Market Overview

Gold Reverses into Bullish Territory


Gold Reverses into Bullish Territory


In recent articles, I have written about the possibility of a big turnaround in gold markets, as prices have fallen sharply this year and are now in desperate need of an upside correction.  In recent sessions, some of these expected moves have come to fruition, as gold markets have shown some of their biggest single-session advances since the middle of October.  Many of these bullish moves have come as a result of broad-based weakness in the US Dollar, which is trading under pressure against both the Euro and the British Pound.  It should be remembered that gold is prices in US Dollars, so these two assets share an inverse correlation.  This means that gold-positive environments are generally seen as the US Dollar is showing weakness against its most commonly traded counterparts.  


The Fed, and the US Dollar


For investors focused on ETFs, these gains have translated in the SPDR Gold Trust ETF (NYSE: GLD), which is now trading firmly above 121 after a brief foray into the mid-117s.  The bull runs have been broad-based across the metals space, as well, with silver prices also hitting its highest levels in about three weeks.  The Dollar Index is now trading in bearish territory, in a streak of four consecutive daily losses, with investors still keenly focused on the next policy moves at the US Federal Reserve.  This is the worst bearish streak in four months


“In order for the Dollar to post substantive gains from current levels,” said Tony Davis of Atlanta Gold & Coin Buyers, “we will need to see some indication from voting members at the Fed which suggest that the US economy is strong enough to start operating on its own -- without the help of central bank stimulus.”  But until these types of comments start to be seen on a regular basis, the Dollar will have trouble gaining traction.  This is positive for gold and since the market has been heavily bearish, moves to the upside could be significant as traders shorting the market will be forced to unwind their positions.  If this causes momentum to build, we could see large runs higher in the underlying gold price given the fact that the metal is heavily oversold relative to recent historical averages.  


Long-Term Perspective


For those with a longer term perspective, it is also important to note that gold is on track to post its first yearly decline since 2000.  Gold’s safe-haven allure has lost some of its attraction since hitting its all-time highs above $1,900 but the real driver of gold prices will come as markets are able to get a better sense of the Federal Reserve’s true intention with respect to its stimulus programs.  Any indication that the economy is prepared for “tapering”  would be a significant positive for the US Dollar.  This would mean that the inversely correlated gold price would start to show weakness once again.  But without these signalled intentions at the Fed, gold is now set to generate a much needed bullish correction.  


The following article is from one of our external contributors. It does not represent the opinion of Benzinga and has not been edited.

Posted-In: Commodities Markets Trading Ideas


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