Can Gold Continue to Grind Higher?

Fundamentals

Gold futures could not sustain an early rally toward record highs, due to a stronger US Dollar and commodity weakness. Despite the down day, Gold traders did get a bit of bullish news early, when the ETFS Gold Bullion Securities and ETFS Physical Gold ETFs indicated that their physical holdings climbed to a record $10 between the two funds. Given the jitters surrounding the EU, it is not surprising to see investors heading to higher ground. This indicates that European investors continue to worry that their investments could face currency risk and are looking to invest in physical assets instead of stocks, bonds and other paper investments. The effect on the Dollar-based gold market, however, remains unclear. A weaker Euro could very well help propel the greenback versus other currencies. A stronger US Dollar could mean diminished demand for commodities and weaken speculator demand for the yellow metal. The Commitment of Traders Report (COT) showed the speculative long position rose by 10,120 contracts, 8,219 of which were non-commercial reportable positions. This could be a sign that the market may be heading toward overbought levels. Many of these trades may have been placed with the expectation of friction at the G20 summit which never materialized. The focus now shifts back to the global economy and growth prospects.

Trading Ideas

The fundamental outlook for August Gold remains a bit murky. There is plenty of uncertainty facing Europe and much of the rest of the globe, but this seems to be fueling longer-term investment buying. Purely speculative buying seems to be coming in a bit slower. A stronger US Dollar could slow buying in the COMEX contract. The chart shows no signs of the market letting up at this point, but the market has refused to make new highs as well. For these reasons, some traders may wish to wait on the sidelines and see which way the market will break out. Traders may wish to focus on new contract highs on the upside and closes below 1225 on the downside.

Technicals

The August Gold chart shows prices heading toward record highs set last week, only to sell-off when the US market opened. The 20-day moving average has been the support line for the market for the past couple of weeks. A close below the average, along with the inability to make new highs, could trigger further selling and possibly signal a near-term top. Solid closes below the 1230 level could send prices down to their lowest levels in over a month. New contract highs, on the other hand, could trigger further technical buying.

Robert Kurzatkowski, Trading Specialist