Gold Fundamentals Bullish, But Questions Remain

Fundamentals

Gold futures have moved solidly above the $1,000 mark once again on Dollar weakness, but investors are beginning to question whether prices will be willing to advance beyond highs made in September. The economic outlook is beginning to look a bit hazier once again, making Gold attractive as an alternative investment. Investment in the SPDR Gold Trust keeps pouring in from speculators who are concerned that stock valuations have risen too sharply, too quickly. Inflation pressure may be heating up once again due to stimulus spending and a weakening Dollar, further adding to Gold’s cause.

The stock market has not had a meaningful correction to this point, and it is difficult to tell if and when it will correct. If the stock market faces pressure, the Dollar may find some support and, in turn, Gold prices could correct. The US Dollar is going to have a major impact on whether Gold can sustain rallies beyond the $1,000 level. If forex traders are unable to push the Dollar lower, it could force Gold rallies to stall out. Another bearish force that may inhibit further advances could be the lack of value at current price levels

Trading Ideas

The fundamental outlook for Gold remains bullish, but questions about the sustainability of current price levels remain. The technical outlook is even more questionable, not giving a definitive direction to the market. This suggests some traders may possibly wish to take on a cautious bullish approach to the December Gold contract, such as a bull call spread. Some traders may want to consider purchasing the November Gold 1030 Call (GCX91030C) and selling the November 1050 Call (GCX91050C) for a debit of 5.00, or $500. The trade risks the initial investment and has a maximum profit of 15.00, or $1500, if the December Gold contract closes above 1050.00 at expiration.

Technicals

The December Gold chart shows a confirmation of an M-top with the recent decline below the $1,000 level. The chart was flagging, indicating prices could move lower. However, the recent spike in prices makes the pattern invalid. Prices have now solidly closed above the 20-day moving average, indicating that a near-term low may be in place. In order for Gold prices to maintain their upward momentum, the December contract must close above the September 16th high close of 1020.20. Failure to do so could spur profit-taking and possibly trigger bearish action on the chart.

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Comment by mthomas

2009-10-06 13:07:19

Amid the rise of the gold price today to a new all time high, I would like to highlight Yamana, which is one of my favorite core holdings in gold miners. This morning it updated production guidance and came in ahead of many analysts’ expectations. I read a good summary and analysis of their news release at http://www.goldalert.com, where it also discusses market speculation that the company may be looking for a suitor. I think Yamana, as well as many other gold miners who offer leverage to the gold price, will continue to outperform due to the government’s insistence on trying to prevent deflation at all costs. The dollar is close to new 52 week lows, and the willingness of our govt to debase the currency in order to bail out Wall St. should continue to benefit gold, in my opinion.

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