Greece Austerity Vote Optimism Drives Gold Higher – Gold June 28, 2011 |
August Gold rallied on Tuesday under thin trading conditions. Volume was light and the rally may have been triggered by short-covering ahead of Greece’s austerity vote rather than fresh buying. Although the close above the psychological $1500 level could develop into something important, at this time it doesn’t mean too much as investors clearly have a little too much on their minds to worry about price levels. Optimism over the potential favorable austerity vote in Greece was the key driving force today.
Gold has disappointed investors and traders recently because of its lack of follow-through to the upside in the midst of a potential currency crisis and the thin trading conditions that made it appear the market has been abandoned by the big boy traders. Uncertainty is plaguing this market and keeping bullish traders on the defensive. It sounds funny since many believe that financial uncertainty is one of the reasons why investors throw their money at the gold market. During the yearlong rally we’ve seen in gold however, sentiment changed gold from a hedge against uncertainty into an investment vehicle.
So while some may continue to buy gold, banking on financial turmoil and uncertainty to drive it higher, it looks as if many more investors are just interested in protecting their investment in gold. This means converting to a philosophy that includes taking profits and protecting the downside just like an investor would do with a stock that has reached historical highs. The bottom line is that while talk of $5000 gold has contributed to its run-up, with no other investment vehicles returning a more than reasonable rate of return, gold investors have to protect what they have and try to avoid giving back too much of their gains like investments in real estate and equities have done over the past few years.
The short-term focus for gold traders is the lack of inflation and the Greece sovereign debt issue. Recently, more traders seem to be using the Swiss Franc, Japanese Yen and U.S. Dollar as safe haven investments. This is even more evidence that perhaps gold is losing its luster as a store of wealth and safe haven during periods of global financial instability and inflation.
During the next few days, gold is likely to get a boost if Greece passes its austerity measures. This event should trigger a relief rally in the Euro and a sharp break in the Dollar. With the Dollar lower, expectations are that gold will rise.
Technically, however, gold appears to have limitations to the upside. While the close back over the 61.8% retracement line at $1500.47 is impressive, it doesn’t indicate anything except short-covering at this time. A close over the 50% level at $1511.70 will be more important, but it will still not indicate that the market has returned to its previous bullishness.
Although the trend is far from turning higher, gold may base in this retracement zone bounded by $1500.47 and $1511.70, setting up for a potential rally back to 50% of its current swing down from $1559.30 to $1490.80 or $1525.05. At this price it may encounter another round of fresh selling pressure. A downtrending Gann angle at $1519.30 could also stop the market from breaking out to the upside.
A failure to attract the buying power it needs to reach new highs will be a sign that gold investors are becoming more concerned about the lack of inflation and economic growth than they are about sovereign debt problems.
About the author: Commodities Mansion Analyst - James Hyerczyk
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