Free Money Fails To Excite Gold Bulls

Fundamentals

The sharp 10-day rally in equities has stolen some of Gold’s thunder, as investors flock to the stock market. Whether or not these are the seeds for a longer term recovery in equities remains to be seen, but the government policy driving the market rally is setting the groundwork for higher inflation.

The policy of throwing money at a problem is a risky gamble, and Gold may once again see a flight to quality effect if the Treasury Department’s plan fails to stimulate lending. The treasury plans to buy up to $1 trillion of bad assets related to bad real estate gambles, which is roughly half of toxic assets held by banks. The sheer size of the plan is staggering and puts taxpayers on the hook for risky gambles driven by bad government policy.

Not all investors have taken the bait and gone back into equities, as evidenced by the SPDR Gold Trust’s (GLD) physical Gold holdings climbing to a record 1,114.6 metric tons on Friday. The stabilization and rally in commodities such as Gold and Copper suggest that inflationary pressure may be making its way back into the picture, although the broad commodity market has yet to follow suit.

The Dollar Index has been moving inversely to equity prices, which makes yesterday’s rally in both equities and the greenback the exception rather than the norm. This is a confusing time for traders, as the price of Gold moves inversely with both equities and the US Dollar. At this point, it seems as though the pressure from stronger equity prices has had more of an impact on the precious metals than the movements of the currency markets.

If the market is finally satisfied with the government’s plan for the economy, traders’ appetites for risk may continue to increase, dampening the appeal of Gold and precious metals. Gold bulls may wish to take advantage of the recent sell-off in the metal.

If equities keep rallying, there is a possibility that the metal may fall back to the 900 mark. Bulls may want to wait for prices to pull back to purchase a June 950/1000 bull call spread. The spread is currently trading near 20.00, so traders may be able to get the spread for 15.00 in the event that prices continue to decline. The spread risks the initial investment of $1,500 dollars for a maximum gain of 50.00 points, or $5,000, if the contract is trading above $1,000 at expiration. The more cautious approach would be to sell the spread if it reaches 30.00 prior to expiration.

Technicals

The June Gold chart shows a spinning top formed by Friday’s price action, followed by a hanging man candle yesterday, suggesting a short-term negative bias. The recent weakness in prices has not caused any major chart damage to this point, and prices continue to trade above the major moving averages.

Today’s overnight price weakness, though, has brought prices down to the 18-day moving average. Failure to hold the average may suggest that a near-term high may be in place. Prices are once again flirting with the uptrend line and support at 930. If the June contract is unable to hold these levels, prices may consolidate between 890 and 930.

Traders will focus on how the market behaves if and when prices come down to the 890 area, which could have a bearing on the long-term market trend. Failure to hold 890 could mean the market will trade in a wide, sideways range, while holding these levels favors the bull camp.

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