The gold market has been more than colourful over the last few years and its price increase has been exceptional.
The problem with the gold market in 2010 is that it is beginning to meander. The bulls get excited every time we look higher and bears become similarly entranced as the prices slip.
Whilst I don’t like sitting on the fence, all-in-all both the upside and downside look problematic. If the growth projections from various commentators prove to be correct, Gold might once again become a side issue. If that happens then the current values look rather stretched.
Speculators have clearly played their part in driving up the price. But let’s not forget that gold is a commodity and subject to supply and demand. And demand does seem to be waning in certain sectors. Indian demand for gold is being affected by the current extortionate prices; another fundamental reason for capping gold’s gains.
According to Simon Denham of Capital Spreads, “the medium term support is circa $1,075 and for the longer term, support is all the way down at $750. However before this we run into huge resistance to the downside at $1,025 and $860. The bull move momentum is still very much in place but the arguments are getting harder to justify”.
And Mr Denham may have a point. Movements in China to possibly limit the current growth spurt might hit prospects for commodity demand. Any such news would see prices weaken.
With growth so strong in Asia though, it might take rather more than nominally higher interest rates and tighter bank lending requirements to slow things down.
This would call into question the appetite for the harsh braking effort required, especially so soon after the huge urban layoffs of 2008/09. It would not be wise to call the end of the base metal and resource rally just yet.
Having said all this, at the moment, the market looks rather full with long positions still hoping for a continuation of the five year rally. Traders who rely more on the technical side of things are naturally more concerned about momentum, supports etc.
The only people who have made money recently are those investors who have been trading the ranges and betting on the price of gold to go up and then to go down, only to speculate in the other direction again etc.
Whether you are doing this through a financial spread betting account or otherwise caution is required. Trading ranges can be profitable but if the market breaks out then you may need to take the hit before you end up in real trouble. Alternatively put a Guaranteed Stop Loss order on your trades to protect your downside.
A leading financial writer based in the heart of London’s Financial District. Peter Jones is a seasoned commentator on the commodities spreads markets.
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