Gold Getting Its Luster Back
Gold has rallied over $60 since last week and had a technical breakout with a close above $950 an ounce on Friday July 11, 2008. I believe gold will continue to run higher, and recommend buying dips. I’m looking for a longer-term, big upside move. I can see gold trading above $1,000 an ounce in the long-term, but believe it will encounter some short-term resistance between $990 and $1,000.
The market saw some of that resistance on Monday, July 14, 2008 as gold bumped its head against $990 before retreating. The August contract traded at a session high of $989 and then fell as low as $969 in a very volatile session.
You may remember that earlier this year in March, gold broke through $1,000, only to fall back below $900 a couple months later. Prior to that last rally, gold encountered strong resistance between $990 and $1,000, and I think we’ll see the same thing happen soon. However, I feel that over the longer-term, we’ll see prices sustain their levels once they break through the psychological $1,000 resistance level.
Gold is getting some of its luster back, but keep in mind that the U.S. dollar has a large impact on the price of gold. When the dollar is weak, gold is usually strong. The U.S. dollar hit a new low against the euro on Tuesday, July 15 at $1.5988. The weakness in the dollar was attributed to Federal Reserve chairman Ben Bernanke citing of downside risks to economic growth during a speech on Capitol Hill.
Over the shorter-term, I think gold is due for a correction, which may present some buying opportunities. I would start nibbling at $970 and would take bigger bites if it dropped to $960. However, if the market closes below $945, I would probably have to re-evaluate the situation.
The problems with Fannie Mae and Freddie Mac are also making gold more attractive. A government sponsored bailout would either fall on tax payers or require more money to be printed, which would lead to higher inflation and a weaker U.S. dollar. Since gold serves as a safe-haven for those shifting money out of stocks and away from the dollar, I would expect prices to eventually break through $1,000.
If you are watching gold, it’s also a good idea to watch crude oil. Much as the U.S. dollar affects gold, crude oil also plays its part. Aside from the resistance at $990, the reason gold fell off the highs to as low as $969 during Tuesday’s session could be attributed to a sharp drop in crude oil during the day. Crude oil futures for August delivery fell over $9, or 6 percent, below $136 a barrel following concerns that slower economic growth could affect demand for crude oil.
Looking back to when gold was over $1,000 an ounce, crude oil was near $110 a barrel. Historically, I see gold prices as 10 times the value of crude oil prices. Given the weakness in the U.S. dollar, I think gold will catch up to crude oil in terms of where prices have been historically. Therefore, I can easily see gold moving up to $1,200 or more.
One way to approach gold would be to buy dips, as I mentioned earlier. You could also consider bull-call spreads or outright calls for a more conservative approach, if you don’t want to trade futures outright. Since the August contract expires soon, I am advising my clients to switch to the December contract, which trades at about a $10 premium to the August contract.
Since prices are changing on a day-to-day basis, please feel free to call me at 866-231-7811, for specific trading ideas to match your account size and risk tolerance.
Frank J. Cholly is a Senior Market Strategist with Lind Plus. He can be reached at 866-231-7811 or via email at fcholly@lind-waldock.com.
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