Gold Surges on Speculative Buying, Short-Covering

 December Comex Gold prices surged after two days of consolidation that indicated selling pressure had dried up. The rally was the biggest gain for the market in almost three weeks. Oversold technical conditions and strong support near a two-month low also contributed to the strength.

Fundamentally, position-squaring ahead of talks between Russian President Vladimir Putin and Ukrainian counterpart Petro Poroshenko also provided firepower for the rally. Interest in safe haven investments such as gold could continue to rise this week if speculators perceive a threat of an escalation of problems between Ukraine and Russia as well as in northern Iraq.

The EUR/USD and GBP/USD posted small gains after the release of a report that showed U.S. Durable Goods excluding transportation fell. The report showed that durable goods fell 0.8 percent in July. Traders were looking for a 0.5 percent reading.

Recent technical action suggests the Euro and British Pound may be oversold, giving short-sellers an excuse to take profits. This action is likely to produce a short-term rally which is likely to be met by fresh shorting pressure since the fundamentals backing each currency remain bearish.

Late last week, European Central Bank President Mario Draghi confirmed that the central bank was looking at fresh ways to stimulate the Euro Zone economy including unconventional quantitative easing. Later this week, investors are likely to react strongly to the latest preliminary reading on German inflation. Today’s price action suggests a bearish reading may have already been baked into the market.

Oversold conditions and renewed interest in geopolitical events helped underpin October crude oil. With hedge funds presumably out of the long side of the market, crude oil may be ripe for a speculative rally. In addition, hedge fund and commodity fund profit-taking may also be supportive.  The current chart pattern suggests a support base is building that could trigger a very strong short-covering rally.