Gold Commentary – 08/23/2013

Having seen a bottom in July, the price of gold has rebounded and seems to be relatively flat. The projected tapering of quantitative easing from the Feds is still being watched closely, the theory being that the continued weakening of the dollar caused by the relentless massive issuing of new funds strengthens the position of gold as an alternative investment, and therefore leads to increased demand and higher prices. If the quantitative easing is reduced, this implies that gold will weaken as the currency becomes viewed more favourably.

As can be seen from the chart below, for a protracted period up until July this was not the case, despite the ease with which dollars were being pumped into the economy. Gold has been declining for many months since its high in October 2012.

From a technical analysis point of view, it appears that gold may now be on the rise, with an inverted head-and-shoulders pattern showing up, the head in July 2013, with the shoulders each side in May and August. If this is to be believed, the reversal was confirmed by the clear rise in mid August through the 1320 level. However, its rise may be stalled at the current 1375 since this was a confirmed support level on the way down and so may prove to be a resistance on the way up. When trading it is important to understand what the charts are telling us, not what we believe they should do.

Following through on this theory of a change of fortune for gold, once the 1375 level is clearly breached the next levels which are critical include 1420 and 1480, both potential resistance levels in the past. To revert to fundamentals, it may happen that gold will not stop until it reaches 1800, a level which J.P. Morgan, and more recently, Alpari, predicted earlier this year would be seen by now.

Curiously, some commentators have indicated that it is J.P. Morgan that caused the recent slump in value, by taking hold of a massive short position some months ago which allowed them to influence the market. Certainly it has booked a large profit on the shorts this year, and has now reversed its holding and manoeuvred itself into long contracts on 16,000,000 ounces. This is no small feat, and the fact that the turnaround of these positions has been achieved in a matter of months suggests a determination that may result from strong intuition. So if J.P. Morgan has anything to do with it, or if it has an insight on the market, the rise to 1800 should happen during the next few months, and certainly by the early part of 2014.

By Marcus Holland from FirstBusiness.net.