Fundamentals

Gold futures continue to move higher, but at a slower, grinding pace. The metal has attracted attention recently due to the faltering economic data. However, rallies have been reined-in by the rebound in the US Dollar, which acts as the world's reserve currency. Inflation has also been much tamer than expected because of demand for commodities outside of foodstuffs drying up. Therein lies the problem traders have been grappling with. The state of the economy suggests Gold may be attractive as a defensive instrument, but on the other hand, Gold's other driving forces have been moving in the opposite direction. We are heading into a very important time of the year for Indian Gold demand, the wedding and festival season, which stretches from September to December. If demand for Gold becomes more elastic, demand could suffer. It is unclear whether the high price of Gold will have a major impact on demand, as personal incomes and savings have also risen, which could act as a counter-balance.

Technical Notes

Turning to the chart, we see prices continuing to move higher after breaking-out above the 1210 resistance area. The pace of the rally, however, has slowed. The December contract was unable to break through the 1245 level, which is the nearest resistance area on the chart. If the market is about to cross 1245, we could see a test of highs at 1265. If the market is unable to maintain its upward momentum in the near-term, we could see the December contract come down and test the 1225, or possibly the 1200 level. The RSI has been in overbought territory for the past two weeks, but it looks as though the indicator may drift back into neutral levels.

Trading Ideas

We are in a period of uncertainty as far as the economy is concerned, which seems to favor Gold. However, weakness in commodities and a stronger greenback are currently working against the metal. The wildcard may be physical demand from India. Some traders may wish to take a more conservative approach and enter into a debit spread toward their bias, given the fact that the market may be approaching a level of high volatility.

optionsXpress