Not Dead Yet

Fundamentals

Just as Gold seemed to have lost its luster, traders began buying-up the precious metal when the futures traded down to the 1050 area. The bounce coincides with weakness in equities and a rebound in Crude Oil, indicating that traders still have faith in the metal as a safe haven investment. Over the same period of time, the Dollar Index has been trading sideways, unable to break out to new highs. The uncertainty over European debt given the Greece debacle and traders’ lack of enthusiasm with US fixed income instruments suggests that there is a chance that the price of Gold may disassociate itself from its natural inverse Dollar relationship if the currency climbs slowly. In times of global economic turmoil, both the greenback and precious metals are seen as flight to quality investments. However, a strong enough surge in the US currency could eventually dampen the appeal of Gold as an investment and cause traders to flock to fixed income instruments. Equity prices will likely also have an impact on traders’ decisions. If equity prices were to continue falling, it would be viewed as a sign that traders expect the economic recovery to cool, thus decreasing the likelihood of runaway inflation. There are plenty of arguments for both Gold bulls and bears at the moment, hinting at erratic market action.

Trading Ideas

Both the fundamental and technical outlooks for the Gold contract offer a cloudy outlook. The lack of direction would normally set-up for a neutral strategy, such as a short strangle or a long straddle. The possibility that volatility will remain high may make a short strangle too haphazard at the moment, yet the high premiums on Gold options due to the volatility suggest that there may not be enough market movement to cover the cost of the premiums. For this reason, some traders may wish to wait on the sidelines and enter the futures market once the outlook clears up.

Technicals

Turning to the chart, the April Gold contract is currently trading above the 100-day moving average. The recent closes below the average were a technical defeat for the bull camp, however this move back above the average could be a sign that selling pressure may abate. This may also make the downward crossover of the 20 and 100-day averages less significant. To gain additional upward momentum, the April contract would likely have to cross above the relative high close at 1117.40.

Rob Kurzatkowski, Senior Commodity Analyst