- Gold, still near key technical level, generates some interest from longs
- Dollar has spent lots of energy last 12 weeks, looks tired
- Potential for reflex rally on GLD rises
Phew! Sighs of relief expressed by gold bugs. The metal managed to stage a rally yesterday – up 1.4 percent. A pittance in a big scheme of things! It did not even recoup the loss suffered last Friday when it gapped down post-September jobs report and a surge in the U.S. dollar. But one can only stretch a rubber band for so long without snapping it. Not to labor the point, but the metal has had its share of pricing pressure. It has dropped in nine of the last 12 weeks. Contrast this with the U.S. dollar that rose in all those 12. The point being, while the latter has markings of a highly overcrowded trade, the former is the opposite. Almost no one wants it. No one thinks it can rally.
As laid out on Monday, it is tough to be too bullish on an asset that was supposed to but could not rally in the midst of hand-over-fist money-printing by the Fed. But there is a difference between an investment and a trade. And increasingly it is looking like the latter is developing here. The role of the dollar is undeniable in this respect. The greenback could very well be itching to go lower in the near-term. To be clear, being a currency it trades on technicals as much as it does on fundamentals. From this perspective, there is nothing wrong with the technical picture, except for the parabolic multi-week move. On the US dollar index (85.89), support remains strong around 85. Shorter-term moving averages have not even flattened out. Once again, using the analogy above, no tree grows to the sky. More often than not, impending weakness is a process, and it takes time to develop. There are some signs of fatigue appearing, and in the present context, the yellow metal is probably the best way to play this.
Gold – by default GLD, the gold ETF – remains way oversold short- to medium-term. Monthly indicators have a little bit still left before they get to oversold conditions. Hence the ETF (116.03) cannot afford to lose the 114.50 support. Assuming it is not breached, potential for a reflex rally has risen.
