Fundamentals
It sure looks like some so called “Gold Bugs” have been swatted recently, as the yellow metal’s historic price rise has hit some speed bumps lately. Ironically, one of the big bullish arguments for buying Gold was the fear of rising inflation tied to a weaker U.S. Dollar, as investors feared uncontrolled government spending and rising budget deficits. However, despite no real plan to control the U.S. budget deficit, the U.S. Dollar has risen sharply, especially versus the Euro, as fears of possible default on government debt by Greece, and possibly other members of the European Union have caused traders and investors to flee from the Euro and into the U.S. Dollar. The question that still needs to be answered is why investors are not rushing into Gold as a “safe haven” investment. It was just this past November that the International Monetary Fund sold 200 tons of Gold to the Central Bank of India, which really sparked the notion that Central Banks were view Gold as a way to diversify their foreign exchange reserves and to bring potentially huge buying interests into the Gold market. However, the Gold market has failed to extend its gains as 2010 begins, falling along with most other commodities, as fears that any global economic recovery will be slower than had been hoped for, due to China’s attempts to put the brakes on its own economic expansion and the quagmire that the European Union has to deal with regarding possible government bond defaults by some of its member nations. This slowdown has put potentially rising inflation concerns on the back burner and is causing speculators to abandon their long positions in commodities — including Gold — which in turn sparks further long liquidation selling as margin calls are issued and even positions in fundamentally bullish commodities such as Sugar are forced to be liquidated to meet margin demands in other markets. So ultimately, the large long speculative holdings in Gold are actually working to its detriment lately, as liquidity needs trump even the most bullish fundamental factors in any given market. However, once the dust begins to settle, it would not be a big surprise to see the Gold market once again resume its bullish trend — especially once all the weak longs have left the market and the one-sided bullishness that was overhanging the market has been removed.
Trading Ideas
Any trader holding a long Gold futures position this past week has experienced a harrowing sell-off, as sell-stops were triggered and forced out weak longs and those who entered long positions just as the market turned lower. Some traders who still look for gold prices to move higher in the long-term, but who wish to limit their potential risk, may want to consider the purchase of bull call spreads in Gold futures options. Looking out to the June gold futures, trading at 1053.70 as of this writing, a trader could choose to buy a June Gold 1100 call and sell a June Gold 1200 call for about 24.00 points, or $2400 per spread, not including commissions. The premium paid is the maximum potential loss on the trade, with a potential profit of $10,000, minus the premium paid should June Gold be trading above 1100.00 at option expiration in late May.
Technicals
Looking at a daily continuation chart for Gold, we notice the successive lower highs made after prices peaked back in early December. The recent failure of front month Gold to trade above the 20-day moving average sparked fresh short-term selling pressure. It looks like a large number of sell-stops were triggered once the 100-day moving average was taken-out on the downside. If we look at a Fibonacci retracement from the major lows made in late October of 2008 to the highs made this past December, we notice that Gold prices have not even fallen to the 38.2% retracement level! Ironically, this widely-watched level is currently corresponding closely with the 200-day moving average, which is just below the 1020.00 area and would make this a major technical support point. Despite the recent bouts of long liquidation selling, speculators are still holding a relatively large net long position, with the Commitment of Traders report showing both large and small speculative accounts holding a net long Gold position of over 261,756 contracts as of January 26th. Though this is down just over 34,000 contracts for the week, it is still a relatively large position that may spark further liquidation selling if support points are broken. 1018.00 is the next key support point for April Gold, with resistance found at the recent highs near 1125.00.
Mike Zarembski, Senior Commodity Analyst
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1 comments:
No they haven't "abandoned" gold. The misconceptioon is that gold ispriced in dollars and thus of latehas lost (alittle of its) value. that is not the case. DOLLARS are priced in gold by the community and recently dollars have appreciated due to the flight to "safety" and therefore gold has kept its REAL value but for a short while dollars have appreciated. However, in and of itself a Greek bankruptcy or bond default should -in theory- not affect the Euro as such very much, Greece being maybe 3% of the total. However, just as a Californian bankruptcy would reflect badly on the "state of the Union" as a whole so would the default of on EU country, coupled with the rising interest rates and thus further destabilisation of the remaining over-leveraged member states, make investors wonder when sovereign default across the board is likely. Thus they wouldn't commit themseves to bonds of longer maturity and that's the beginning of the end.
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