Gold Breaks Out - Or Does it?
While stock and bond markets meandered through uneventful pre-Labor Day trade today, such was not the case with gold. The yellow metal shrugged off lackluster Asian trading overnight last night to pick up steam once European trade started, helped along initially by a firmer euro. Once New York trading got underway, it was off to the races. Gold sprinted higher at the start of U.S. trading, quickly moving up above $370 per ounce, and closing on the cash contract at $372.30. The close of $374.50 on the December contract was the highest level gold has reached in three months. More important for some is that today’s rise broke above the downward trend line in place since all the way back in February; a technical level I shared with you in last month’s issue.
Until today, gold’s behavior had been exasperating of late. Its trading range has incrementally narrowed in recent weeks, and even more so in recent days. As one analyst termed it late last week, it seemed as though the ongoing battle between gold’s bulls and bears had entered the hand-to-hand combat stage. One minute gold seemed sure to be ready to break above its overhead resistance, only to falter. The next, it seemed as though a shake-out was coming-but then physical demand again materialized in the $358-360 per ounce area, and the metal was able to stay above its rising line of support.
Encouraging signs have come from gold’s ability to keep most of its latest gains in tact in spite of a rally in the U.S. dollar. This and seemingly stronger fundamentals have encouraged the bulls; in addition, geopolitical worries from the Middle East to India have added support. As a result, going into today, net speculative long positions on the Comex had surged to a record; and positions were added to aggressively today.
Keep in mind that, as I have written a few times lately, gold’s activities are still ruled largely by short-term traders. One reason for today’s action, in fact, is that some options contracts for August were expiring. It appears that at least some of the impetus for today’s surge was many of the same speculators who had expiring contracts, say, at a gold price of $365 or $370 goosed a thin market higher so as to exit the older positions at a better level. This is reason to give us a little worry that today’s [gold] break-out could turn out to be a temporary wonder. Without a strong follow-through, we could just as quickly see the record net long position unravel, if many of these same traders see gold’s recent good technical behavior fading.
Some comments over today’s trade also centered on speculation that, at next month’s I.M.F. meeting in Dubai, we might see a renegotiation or extension of the 1999 Washington Agreement where 15 central banks agreed to limits on their annual gold selling and leasing activity. That could extend and keep transparent the supply coming to market from this source and-unless central banks decide to unload significantly higher quantities starting in 2004-be another bullish development for the market.
As I’ve said recently, I’d feel better about the gold market-and the current pricey level of gold shares-if there was more evidence that stronger, longer-term hands were a bigger factor in the market. They still are not-at least to my satisfaction. Thus, we need to watch gold and gold equities VERY closely in the coming days to see that it maintains its upward momentum. If gold is sooner rather than later able to move above late May’s high of $378 per ounce with any conviction, another $20 could quickly be tacked on. At the first sign of a loss of momentum, however-and especially if we start to see an unwinding of the record net long positions-we’ll want to cut back our exposure to the sector temporarily. For now, keep to your 15% portfolio weighting in gold shares.
While stock and bond markets meandered through uneventful pre-Labor Day trade today, such was not the case with gold. The yellow metal shrugged off lackluster Asian trading overnight last night to pick up steam once European trade started, helped along initially by a firmer euro. Once New York trading got underway, it was off to the races. Gold sprinted higher at the start of U.S. trading, quickly moving up above $370 per ounce, and closing on the cash contract at $372.30. The close of $374.50 on the December contract was the highest level gold has reached in three months. More important for some is that today’s rise broke above the downward trend line in place since all the way back in February; a technical level I shared with you in last month’s issue.
Until today, gold’s behavior had been exasperating of late. Its trading range has incrementally narrowed in recent weeks, and even more so in recent days. As one analyst termed it late last week, it seemed as though the ongoing battle between gold’s bulls and bears had entered the hand-to-hand combat stage. One minute gold seemed sure to be ready to break above its overhead resistance, only to falter. The next, it seemed as though a shake-out was coming-but then physical demand again materialized in the $358-360 per ounce area, and the metal was able to stay above its rising line of support.
Encouraging signs have come from gold’s ability to keep most of its latest gains in tact in spite of a rally in the U.S. dollar. This and seemingly stronger fundamentals have encouraged the bulls; in addition, geopolitical worries from the Middle East to India have added support. As a result, going into today, net speculative long positions on the Comex had surged to a record; and positions were added to aggressively today.
Keep in mind that, as I have written a few times lately, gold’s activities are still ruled largely by short-term traders. One reason for today’s action, in fact, is that some options contracts for August were expiring. It appears that at least some of the impetus for today’s surge was many of the same speculators who had expiring contracts, say, at a gold price of $365 or $370 goosed a thin market higher so as to exit the older positions at a better level. This is reason to give us a little worry that today’s [gold] break-out could turn out to be a temporary wonder. Without a strong follow-through, we could just as quickly see the record net long position unravel, if many of these same traders see gold’s recent good technical behavior fading.
Some comments over today’s trade also centered on speculation that, at next month’s I.M.F. meeting in Dubai, we might see a renegotiation or extension of the 1999 Washington Agreement where 15 central banks agreed to limits on their annual gold selling and leasing activity. That could extend and keep transparent the supply coming to market from this source and-unless central banks decide to unload significantly higher quantities starting in 2004-be another bullish development for the market.
As I’ve said recently, I’d feel better about the gold market-and the current pricey level of gold shares-if there was more evidence that stronger, longer-term hands were a bigger factor in the market. They still are not-at least to my satisfaction. Thus, we need to watch gold and gold equities VERY closely in the coming days to see that it maintains its upward momentum. If gold is sooner rather than later able to move above late May’s high of $378 per ounce with any conviction, another $20 could quickly be tacked on. At the first sign of a loss of momentum, however-and especially if we start to see an unwinding of the record net long positions-we’ll want to cut back our exposure to the sector temporarily. For now, keep to your 15% portfolio weighting in gold shares.
