Gold Trades Slightly Higher in Asia after Sharply Lower Session – Gold June... |
August Gold is trading slightly better overnight following a sharp break in New York on Thursday. Gold plunged over $30 on Thursday as the U.S. Dollar rose sharply. The rally in the Dollar and subsequent breaks in equities, the Euro and gold was triggered on the news that the U.S. and other major industrialized nations would release up to 60 million barrels of oil from their strategic reserves on the open market over the next 30 days. The move is an attempt to provide stimulus to the global economy that is on the brink of slowing down.
After popping through recent resistance at $1555.00, Gold began to weaken the day before after Fed Chairman Ben Bernanke announced that there would be no new stimulus plan while acknowledging that the economy was slowing down. The news that stimulus was being withdrawn and that no new plan was in the works underpinned the U.S. Dollar putting some selling pressure on the Gold.
Thursday’s news regarding the release of the oil initially shocked the equity and commodity markets. In addition, commodity-linked currencies also fell sharply, leading to a strong rise in the U.S. Dollar Index. With the Dollar up and risky assets down, traders abandoned weak gold positions.
The break in the gold market was hardly a surprise to chart watchers. Although the CME Group lowered speculative margins late last week, buyers refused to buy gold at such lofty levels. It almost seemed at times that bullish traders had abandoned the long-side of the gold market after watching crude oil and silver break sharply since May. In addition, the inability for gold to rally in the midst of the sovereign debt crisis in Greece made some suspect that it had lost its luster as a hedge against calamities.
This makes the real reason for the weakness in gold the strength in the Dollar. The U.S. Dollar Index had made two major bottoms in early May and early June. Although there has not been a true breakout to the upside, news that the global economy was slowing, the end of the Fed’s quantitative easing program and the risk of contagion in the Euro Zone are three reasons for the Greenback’s strength.
Technically, now that gold is beginning to show signs of distribution, selling pressure may begin to mount. Short-term oversold indicators may, however, hinder the break somewhat over the next few days.
Based on the January bottom at $1314.20 to the early May top at $1577.70, August gold is now poised to continue lower to a major retracement zone at $1445.95 to $1414.86.
Currently the market is finding support on an uptrending Gann angle at $1518.20. Once this angle is cleared and the swing bottom at $1511.40 is broken, there is literally nothing left to support the market, setting gold up for a near-term break into the previously identified retracement zone at $1445.95 to $1414.86. Because of the size of Thursday’s break, traders should be careful pressing the market at current levels because of oversold factors and to avoid getting caught in a bear trap.
About the author: Commodities Mansion Analyst - James Hyerczyk
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