Fundamentals

Gold futures have been in a choppy, sideways range this past week, as traders try to decipher the myriad of recent economic data. The Gold market has been in a state of flux, and we have seen the market disassociate itself from the normal inverse relationship with the US Dollar. The FOMC policy statement could be seen as a positive for the metal. While the Fed does suggest that inflation is tame, the statement also suggests that the central bank could keep rates low longer than previously expected. The recent jump in food commodity prices because of the Russian wildfires and poor growing conditions in other nations combined with low interest rates and the fading US Dollar all point toward the possibility of a sharp jump in inflationary pressure. Gold market fundamentals have been strong for some time, and buying by long-term investors has remained strong. What the market has been missing is buying by short to intermediate-term speculators. These traders have been focused on newsworthy and fast-moving commodities, such as energies and food commodities that are or could be experiencing shortages. While everyone needs to eat, the increasing concerns over the state of the global economy could cause the energy complex to lose some of its luster. If traders exit the petroleum and base metal sectors over economic concerns, they may choose the Gold market as their defensive play.

Technical Notes

The December Gold chart shows prices bouncing off support at the 50% retracement, measured from February lows to June highs. The 50-day moving average has acted as resistance for the past week. Prices have also crept up toward chart resistance near 1215. A close above these levels could trigger further buying, and could result in a test of contract highs. Failure to break through here could be seen as a letdown, and prices could come back to test the 38.2 Fibonacci retracement at 1181.70.

Trading Ideas

The Gold market's fundamentals have remained solid, due to an uncertain economic future and a continuation of the low interest rate environment in the West. The Gold chart has improved, and we could be at a make or break level as far as the near-term direction. Some traders may wish to consider putting on a bull call spread by buying the December Gold 1275 calls (GCZ01275C) and selling the December 1300 calls (GCZ01300C) for a debit of 5.00, or $500. The trade risks the initial premium for a potential profit of $2,000.

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