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James Hyerczyk
Comex Gold
Comex Gold

Gold futures closed higher last week, breaking out of an eight week rally as short-sellers continued to cover aggressively and speculative buyers returned in reaction to heightened volatility in the stock market.

Technical factors are also playing a role in the rally, but as with any breakout, increasing volume will be necessary to sustain the move, short-covering alone just won’t do it.

For the week, December Comex Gold futures settled at $1222.00, up $16.40 or +1.36%.

After trading inside a $1221.40 to $1167.10 range since the week-ending August 17, the market appears to be ready to launch an even higher move if it can maintain support over $1221.40. The weekly chart indicates there is room to rally to $1277.60 before buyers encounter any serious resistance.

Stripping out the stock market volatility, gold is still being largely influenced by the direction of U.S. Treasury yields and the U.S. Dollar.

So far we’ve seen a textbook move in the market. Stock prices are falling due to numerous concerns such as overvaluation and competition with bonds as an investment. This move is driving investors into safe-haven Treasurys. Yields are falling as a result, making the U.S. Dollar a less-attractive investment. This is helping to increase foreign demand for dollar-denominated gold.

For several weeks while gold was forming its trading range, we were asking whether it was an investment or a safe-haven asset. Based on last week’s price action, it looks as if traders have answered that question.

Gold still doesn’t pay a dividend or interest, which means from an investment perspective, especially during a rising interest rate environment, it’s still unattractive. However, from a safe-haven perspective, it’s a nice place to park money while the stock market tries to stabilize.

At the start of trading last week, government data still showed hedge fund and money managers holding net short gold positions. Now that the market is beginning to breakout of its eight week trading range, we’ll be looking to see if these manager players have gone flat, or if they have shifted their position to net long.

This information is important to longer-term traders because a shift to net long will put the gold market in a position for further upside action or even a change in trend to bullish. Currently, it looks as if another drop in stocks could drive gold another $50.00 higher, but unless hedge fund sentiment shifts to net long, the rally is likely to be short-lived.

This week, it’s best to continue to play the upside momentum and the stock market volatility, but keep in mind, we’re still in a downtrend and you’ll be trading against the main trend. This means you should be setting upside targets and taking what the market gives you. Don’t try to press for too much to the upside. Just go with the flow. We’re not in an uptrend or a bull market yet.

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