TRADING GOLD THIS WEEK
After a strong finish last week, most of the major markets begin the week looking a bit sluggish. The lack of follow through buying should have been expected as we enter a week choked full of very important reports and economic policy decisions.
Last week’s rally in the Gold Futures began mid week when the Euro Currency finally began to show signs of life after it inched toward the much anticipated target of 120. What began as a profit taking support bounce quickly turned into a three day recovery rally fueled by supportive statements made by ECB President Mario Draghi, which were soon backed by Angela Merkel and Francois Hollande. In short, they committed verbally to taking any means necessary to support the Euro. No actual plans were formally announced, but it was enough to give the European Currency a much needed break from the drubbing.
The rally in the Euro helped the Dollar back off from its month long rally, and this overall helped underpin the Gold Market. For the record, we can not give all of the credit to Euro. There is also heavy speculation that the US FED may take a supportive stance this week after concluding their monthly FOMC meeting.
After Ben Bernanke testified in front of Congress on July 17th, economists began speculating that the FED may have to once again rescue the market with supportive economic policy. Speculation grew into expectation following the remarks made in Europe last Friday, but it is still unknown what the FED has left to bring to the table. One idea that has been talked about the most revolves around the FED cutting interest rates that is paid on bank reserves, which will bring down short term borrowing costs and in turn stimulate lending. The FED could also extend lowered interest rates until late 2014 or possibly even step back into the bond market with another round of Quantitative Easing.
While QE is highly unlikely, I believe that any supportive statements made this week from Europe or the United States would help Gold Futures rally. As seen on the chart above, Gold prices made a convincing move out of the narrowing range and even tested the high prices from early July. I mentioned last week that a breakout would likely have two targets, first $1600 and then $1620. Now that both targets were met, we will likely hold the range between these two prices until final announcements are made in the US on Wednesday, followed by an ECB press conference on Thursday. If there is follow through buying above $1620, the next targets should be June’s high price near $1640, then the 200 day moving average closer to $1660. Conversely, if last weeks remarks are not backed with anything concrete, then last weeks rally will be lost in a flood of selling in the Gold. The lower end of the range would be priced around $1560.
Good luck this week in the markets and as always, please feel free to call or email my office with comments or questions about trading Gold or any other futures. I can be reached at (888) 272-6926 or by email at bbooth@longleaftrading.com
July 30, 2012 (Source: Brian Booth, Longleaf Trading Group)
