Gold Ready to Heat Up as Europe Melts Down?
Tuesday, November 8, 2011
Gold futures have quietly been moving higher in recent weeks. The precious metal has taken a back seat to commodities that have been moving sharply, such as energies and base metals. European concerns seemed to thrust themselves into the spotlight just as traders began diverting their attention to other areas of the world economy. Technically, the December Gold contract appears to be heading into an area of resistance, which could slow prices in the near-term. Gold volatility is lower than it has been recently, but it remains higher than its "normal" range in the teens. Some traders may perhaps want to consider a bull call spread, like buying the Dec Gold 1800 calls and selling the Dec 1850 calls for a debit of 17.00, or $1,700. The trade risks the initial cost and has a maximum profit of $3,300 if the underlying futures close above 1850 at expiration.
Fundamentals
The rebound in Gold futures prices accelerated yesterday amid mounting concerns over the state of Italian government debt. The entire Eurozone has been thrown into a state of confusion. Just as there seemed to be a compromise reached to keep Greece solvent in the near-term, the problems in Italy began to rear their ugly heads once again. There is a sense among traders that the problems facing sovereign debt in Europe could eventually become worse than the US banking crisis of 2008, and could linger even longer. This boosts Gold's appeal as a safe haven for traders. The flip side of the equation, which appears to be holding back sharper rallies, is that diminished growth prospects in Europe also lessen Gold's appeal as an inflation hedge. Slow growth tends to lead to slow inflation. The rush of investors flocking to US treasuries has also stolen some of Gold's thunder. Given the problems at MF Global and Jeffries brought on by bets taken in Eurozone debt, it is not at all surprising to see banks and funds attempting to clean those assets off of their balance sheets in favor of US debt, even with unappealing yields. It is of interest to Gold traders to note that Italy has the fourth largest Gold reserves, behind the US, Germany and the IMF, which amount to just over 2,450 metric tons. Italy may be tempted to sell-off some of these reserves to generate much needed cash, or possibly, loan out some of the metal to other countries attempting to bolster their balance sheets. The US Dollar Index does appear to be consolidating and an upside breakout could have a negative impact on precious metals. The Yen intervention concerns seem to be abating at the moment. Traders with long memories seem to have remembered that the BOJ has not historically been very good at devaluing its currency. If the Yen catches a bid, many traders may be tempted to switch out some of their Dollar holdings in favor of Gold.
Technical Notes
Turning to the chart, we see the December Gold contract continuing to edge higher, after bottoming out in late September. Long-term metal bulls may actually like this sort of slow ascent instead of a series of breakaway rallies and violent corrections. Prices have moved above the 1760 level, which was the trigger line for the double-top pattern confirmed in September. The next area of heavy resistance may be found near the 1840.00 level. Beyond this, relative highs above 1900 could be seen as resistance. On the downside, the market must stay above support near 1685 to maintain its upward momentum. The RSI indicator is nearing overbought levels, which could trigger some consolidation or a pullback in prices.
Rob Kurzatkowski, Senior Commodity Analyst
