Gold Market is a Follower, Not a Leader at this Time – Gold June 29, 2011 |
August Gold closed higher on Wednesday, driven higher by the weakening Dollar as investor sentiment shifted to a “risk-on” mentality. Although the move was impressive in the wake of last week’s sharp sell-off, the rally looked tentative at times which is typical for a counter-trend move.
This morning the Greek Parliament voted to approve austerity measures which are likely to open the door for the first tranche of financial aid pledged by the European Union and the International Monetary Fund. The news was bullish for the Euro, gold and equities but proved to be bearish for the U.S. Dollar.
A lower U.S. Dollar traditionally makes commodities priced in Dollars attractive. This is the main reason for the strength in gold, silver and crude oil. If the trend in the Dollar remains down then August gold is likely to firm. Otherwise it may become rangebound.
Although traders often buy gold as a hedge against a calamity or uncertainty, this hasn’t been the case the past several weeks. Despite the close call in Greece and the real possibility of bankruptcy, gold traders remained remarkably stubborn about taking the yellow metal to new highs over the past several weeks. The reason for this could have been that buying gold wasn’t the only safe-haven option available. Gold appeared to be fighting with the Dollar and the Swiss Franc for the same investor dollar.
As the Greek tragedy unfolded throughout June, August gold remained rangebound, but with a slightly upward bias. It never quite could attract enough buying power to push it to new highs. The reason being, gold was an expensive safe-haven vehicle while the U.S. Dollar was cheap.
In addition, today’s gold investor was probably interested in getting a good return on his investment rather than sitting in it for the long-run waiting for another economic collapse. Rather than watch profits erode, gold traders took a little off the top as the metal reached historical highs. They didn’t seem too interested in catching the big winner, but rather more concerned about letting paper profits erode like stocks and real estate did over the past decade.
This assessment leads to the conclusion that traders are likely to sell rallies in gold over the near-term until the market reaches a true value zone. New debt problems can arise in the Euro Zone overnight. If the past few weeks are any indication, investors will most likely seek the safety of the Dollar, Japanese Yen or Swiss Franc in times of trouble rather than sit in overpriced gold.
Technically, the rally in August Gold on Wednesday helped make $1490.80 a new main bottom. It also helped form a new main range between $1559.30 and $1490.80. The retracement zone of this range is $1525.05 to $1533.13, making it the next likely upside target and best zone to sell a rally.
Two prices at $1511.30 and $1522.70 could prove to be important pivot prices on Thursday. The first price is a downtrending Gann angle that could become resistance. The second price is $1522.70 which is the 50% retracement level of the recent short-term range of $1464.10 to $1559.30.
On the downside, uptrending Gann angles from the recent bottom at $1490.80 come in at $1514.80 and $1502.80 on Thursday. Breaking out above $1514.80 will be a sign of strength and may be an indication that the market is going to try to complete a retracement into $1525.05 to $1533.13. A pullback into the angle at $1502.80 could attract counter-trend buyers.
Over the short-run, gold may mount a strong short-covering rally in order to attract new short-traders; the inability to complete this pattern will mean that aggressive bearish traders are beginning to exert their authority.
About the author: Commodities Mansion Analyst - James Hyerczyk
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