Gold: Upside Risks Remain, But Momentum is Slowing
Fundamental Forecast for Gold: Bullish
Gold halted its two week advance, but the decline may be short lived as concerns in the global economy resurface. Gold bulls continue to buy dips in the yellow metal as they deem the bounce in the greenback as a mere correction. Though the correlation between the dollar index and bullion has scaled back slightly, traders should monitor the fundamental developments in the world’s largest economy as well as the U.K. and the Euro-Zone in order to get a full grasp of current levels in the precious commodity. Looking ahead, market participants should not rule out a test back towards the record high as downside risks are capped by the 10-day SMA.
During this past week, there was little event risk to influence the greenback, and in turn, the dollar worked its way into a tight ascending channel on the daily chart. However, next week’s scheduled events will likely paint a clearer picture for the state of the world’s largest economy as USD traders place the spotlight on the advance retail sales and inflation reports. The latter is of particular importance due to the fact that consumer prices quantify changes in purchasing power. Dismal inflation and retail sales reports will likely fuel the Fed’s concerns and lead the dollar to pare some of this week’s advance, and in turn push gold higher. Indeed, in 1980, gold was driven by price inflation in the buck. As Casey Research points out, “the more expensive it became to use dollars as a store of value, the more attractive gold became as an alternative way to store value.” On the other hand, today’s drive in gold prices is driven by the potential of price inflation amid 600 billion dollars in asset purchases and the buildup of treasury debt.
At the same time, sovereign debt concerns in the Euro-zone are also fueling gold prices. Indeed, the yellow metal has had an impressive rally and traders should monitor price action closely as a selloff may be in the horizon. However, for the short term, there is still upside potential. Taking a look at price action, the bullion has halted its two day advance, but downside risks are capped by the 10-day moving average. So long as price action does not close below this level, I do not rule out a test back towards the record high of $1,425/oz. -MW
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