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James Hyerczyk
Gold Bars and Dollar

Gold futures are trending higher early Tuesday for no particular reason. The U.S. Dollar Index is trading higher with support coming from a weaker Euro, Australian Dollar and New Zealand Dollar. U.S. equity markets are drifting lower. Silver is also posting a gain.

Technical factors could be playing a role. On Friday, the market produced a potentially bullish chart pattern, which was confirmed earlier today. Although the market hasn’t cleared any important resistance areas, the price action suggests that shorts are covering.

At 0842 GMT, December Comex Gold is trading $1198.00, up $6.30 or +0.53%.

There is news, but nothing that would support developing strength in the gold market. Perhaps buyers see value at current levels, much like silver traders, who drove the market higher last week. Perhaps it’s just time for a good old-fashioned commodity market rally, given the strength in the crude oil market.

Forecast

It looks like the focus should be on the technical side of the gold market today. The reason for the early strength may be found out later in the session. The key area to watch is the psychological $1200 level. This could be the pivot price that determines whether the next move is $15 higher or $15 lower.

If gold is moving higher for technical reasons then prices should increase further if the short-term fundamentals shift enough to provide additional support for higher prices.

Factors that could underpin gold today are a drop in demand for higher-yielding assets like stocks. A decline in U.S. Treasury yields. They could fall, for instance, if Italy becomes an issue and investors seek shelter in Treasury bonds.

According to reports, top Euro Zone officials warned Italy on Monday its plan to borrow billions of extra Euros to fund spending pledges could tip the bloc back into crisis, vowing to pressure Rome to change course.

We’re not going to try to find a story behind gold’s strength at this time. But if momentum is shifting to the upside, I assure you that someone will find the reason. All we can go by is the price action and it looks as if there is a buyer in there. The market may move as high as the bidding allows it. However, if the buying persists then this may spook some of the weaker shorts. This could signal the start of a meaningful rally because bull markets can’t start until the shorts are taken out.

If you’re a strict fundamental trader or one that won’t play the long side in gold unless the dollar is moving lower then stay away from the market today. However, if you believe that the technicals precede the fundamentals then today may be a good day to trade.

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