Gold Stabilizing?
Tuesday, January 10, 2012
Gold futures have been on the upswing since the New Year, supported by value buying and a more positive investor sentiment on Europe. There are risks in the near-term, as the success of the Gold market appears to hinge on outside markets due to a very tame inflationary outlook. Technically, Gold is consolidating after crossing the 1600 level. The near-term direction of the market is unknown, but sentiment is more positive given the preceding up-move. Some traders may perhaps wish to consider trading a neutral to positive play such as a bull put spread, like selling the Feb Gold 1575 put and buying the Feb 1550 put for a credit of 5.00, or $500. The maximum profit would be the initial credit and the trade risks $2,000.
Fundamentals
Gold futures have rebounded from recent lows on value buying and short-covering, but is the metal set to rebound or is this simply an upward correction? Gold has found some strength in improved investor confidence in the Eurozone, as well as stronger US equity prices. What has stopped some metal bulls from entering the market is that prices are dependent on these outside markets, meaning that a pullback in equities could drag precious metals along with it in the near-term. However, as a means of preserving wealth during times of uncertainty, few investment options are as attractive as Gold. Prices between 1500 and 1600 are extremely attractive for the long-term buyer, which should keep the physical market relatively tight and may limit the downside for the metal. The spark that precious metals need has to come from the speculator. Many speculators appear to have focused on other products like Crude Oil and treasuries during the past several months, so declines in those markets could bring life back into the Gold market.
Technical Notes
Turning to the Feb Gold chart, we see prices making a sharp reversal after testing the mid-1500's. The sharp sell-off came on the heels of a downward breakout from a wedge formation on the daily chart. The point at which Gold reversed was near the measure of the expected move, which suggests that both short-covering and fresh longs contributed to the sharp bounce in prices. Since crossing through 1600, prices have begun to move sluggishly, consolidating in a sideways pattern. Bulls would like to see prices cross through the 1700 level, which contains the October relative highs and November relative lows, in order for the market to gain further traction. It is interesting to note that although prices and the RSI indicator have moved sharply higher, the momentum indicator has only slightly tilted to the upside. This suggests that the market may see weakness or choppy trading in the near-term.
Rob Kurzatkowski, Senior Commodity Analyst
