As Good as Gold?

Today's Idea

Although Gold prices have fallen below the $1500 level, the longer-term trend still appears to favor the bull camp. Some traders looking to get long Gold futures may wish to explore buying August mini-Gold futures, which are currently trading at 1497.00 as of this writing. There is chart support at the May 5th low of 1464.10, below which would be an area to explore placing a protective sell-stop. The upside target would be a test of the previous high at 1577.70.

Fundamentals

Gold futures have held-up reasonably well during the recent commodity-wide sell-off, with some of this relatively "strong" performance tied to Gold's unique status as not only a "commodity", but also as a currency alternative. This "safe haven" status that Gold currently holds has muted some of the volatility seen in the precious metals sector, especially in Silver, which many traders see as more speculative in nature. The recent rebound in the U.S. Dollar has been a major catalyst in the commodity-wide sell-off, as a stronger Dollar makes the purchase of commodities priced in Dollars more expensive for non-Dollar users. However, the continued concerns over the state of the Euro have kept a "bid" in place for Gold from investors looking for a store of value outside of paper currencies. Some analysts cite the continued tightening efforts by the Chinese government as a potential negative for Gold as the world's most populous nation continues to try to control inflation. However, the Chinese are also in the process of diversifying their huge foreign exchange reserves, and one of the major investments expected is the purchase of Gold. China currently holds just over 1,160 tons of Gold, which makes the country the 6th largest holder of Gold. Though this is a huge Gold holding, it only accounts for less than 2% of its total reserve holdings. If the country were to only double the amount of Gold it holds, it would amount to a huge amount of buying and has the potential to keep a "bid" in place during any major sell-offs.

Technical Notes 

Looking at the daily chart for June Gold, we notice prices holding above last week's close, as prices fell by over $100 per ounce from the contract high made on May 2nd. Though prices remain below the 20-day moving average, which would normally be a short-term bearish indicator, we have seen several failed attempts to take-out the uptrend line drawn from the 2011 low made back on January 28th. This trendline should now act as near-term support for the June contract. After moving to overbought levels last week, the 14-day RSI is now reading a more neutral 51.7. Trading volume has also returned to more normal levels after a huge surge in volume on last week's sell-off. The May 5th low of 1462.50 should act as strong support for June Gold, with near-term resistance found at 1526.80.

 


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