Liquidity has been the king in the current market conditions and that is why money managers have chosen to use their gold positions to answer margins calls. Recent headwinds for the gold price have been the recent sell-off due to Europe’s fiscal crisis and the fact that traders have been unwinding their futures positions as their June contracts are set to expire this week.
The 50 period moving average has generally been providing support for the gold price since early 2009 and you can see that the gold market has bounced off key short-term support around $US1,175, as shown on this weekly chart:
Paper currency continues to suffer from deflationary pressures due to the global monetary policies easing and the sovereign debt issues in Europe. This has resulted in gold being seen as the new reserve currency.
The euro is in a bear market and has recently weakened against 14 of its 16 major counterparts. The International Monetary Fund urged Greece and Spain to do more to overhaul their ailing economies, spurring concerns that financial institutions in the Euro area face further losses, and further concerns about capital adequacy and counter-party risk of the bank lending institutions.
On the flip side the Dollar Index, a six currency gauge of the dollar’s value, has strengthened for a fourth day, but it may be setting up a possible double top formation, as seen here:
Gold will remain supported as long as risk aversion remains in place, with Europe providing a great deal of uncertainty near term. Gold is trading higher as investors are again buying the metal as a safe haven from slumping equity markets and the declining Euro. The gold price is set to break the $US1,200 level on its way up for another assault up to $US1,250 and above.
Some gold stocks to consider include: BHP Billiton (BHP), Lihir Gold (LGL), Newcrest (NCM), Pan Australia (PNA) and Resolute (RSG).
By Michael Hevern
Head of Research