Fundamentals

Gold traders have been accustomed to wild ranges and high volatility, but the last few sessions have had wild swings that even the most seasoned traders have been left scratching their heads. Friday's sharp sell-off put an end to the sharp upswing in prices of the past few weeks, if only temporarily. The question now becomes - is this a trend reversal or simply a correction? Fundamental factors have been working in the precious metals' favor, as government spending continues at an unsustainable rate and interest rates remain low. The meteoric rise in prices, however, may be making traders reluctant to buy at current levels and has given holders of long positions the opportunity to take profits. As prices correct, traders may wish to see how prices behave at current levels. If prices are able to level off, traders may view this as a buying opportunity, making the current sell-off nothing more than a bump in the road. If prices begin to slip, Gold may come under extreme pressure if long-holders resolve is shaken. Gold may find itself a victim of its own success if traders view the rise in prices as too much, too soon.

Technical Notes

Turning to the chart, February Gold showed a parabolic rise in prices during the month of November and into the beginning of December. Thursday's spinning top candlestick was a signal of at least a near-term correction. The sharp drop in prices on Friday offered validation of at least a short-term correction, possibly a large one. Monday's price action indicated much indecision among traders. It appears that the overbought conditions may have added to the selling pressure on Friday, but the RSI has come back down to neutral territory. The momentum indicator is nearing the zero line. If the indicator falls below the zero line, prices could see further downside pressure.

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