Gold; Short Term Weakness, Long Term Strength

After witnessing gold prices rise roughly $500 in the last four months, it is not illogical to expect prices to pull back at some point and enter a correction of some sorts. After nine consecutive trading days that resulted in higher pricing today gold showed its first sign of any weakness. While the fundamental backdrop that has moved gold higher continues to be present after such a profound and protracted price increase, gold has become slightly overbought.

After trading to a low of $1939.58 today spot gold is currently down by approximately $15 and trading at $1955. Gold futures basis the December contract traded to a low this morning of $1952 before recovering, and as of 4:00 PM EDT is currently fixed at $1970.70, a decline of $6.00 on the day.

Today’s modest price decline is occurring in tandem with U.S. Dollar weakness. According to the KGX (Kitco Gold Index) as of 4:16 PM EDT spot gold is currently fixed at $1954.70 which is a net decline of $16.20 on the day. On closer inspection traders bidding gold pricing lower accounted for a decline of $22.90 on the day, while dollar weakness added $6.70 of value per ounce resulting in today’s decline of just over sixteen dollars.

Dollar weakness became evident after the dollar index reached a high just above 103 in mid-March, is currently down – 0.53% in trading today, and fixed at 92.935. The cumulative decline of the dollar index is in excess of 10% over the last 4 ½ months. Dollar weakness can be attributed to the massive asset accumulation by the Federal Reserve, coupled with interest rates near zero. However, the Federal Reserve’s Central Bank is not acting alone, globally central banks have also been actively attempting to slow down their countries contracting economy.

Based upon the massive expenditures by global central banks currencies worldwide have been the devaluating as central banks continue to “print money” in order to infuse liquidity into their economies. It is for that reason that there is a high probability that gold will be much higher three months from now, six months from now and a year from now. Although our current technical studies indicate that gold could trade as high as $2200-$2300 per ounce by the end of the year, the real question becomes if gold does begin to pull back rather than simply consolidate, how deep of a correction will occur before the next leg of the rally begins?

Wishing you as always good trading and good health,