We are experiencing a nice upmove in gold in today's session which is also being participated in by silver.
There are a couple of things at work today. First, after expectations that the Fed was going to announce a tapering at next week's FOMC meeting, traders have now largely dialed that back.
Secondly, and more importantly, this is contributing to further US Dollar weakness. We saw that yesterday but it is more notable in today's session as the USDX slid under the 80 level.
The Dollar has been recently been trapped in a range trade of its own. The top comes in between 81.40 - 81.00 while the bottom of the range is 79.20 - 79.05. As the Dollar has pushed higher in this range, gold has pushed lower. Now that the Dollar is breaking lower and moving back towards the bottom of the range, gold is powering higher.
In the case of gold, its upward progress has been exaggerated due to the build in hedge fund short positions which are vulnerable anytime one of these overhead chart resistance levels can be violated. That brings on another wave of strong short covering, which coupled with bottom picking, results in some sharp moves higher.
It should also be pointed out that we are now at that time of the year when some traders are going to begin squaring books for the end of the year. Shorting gold has been a fantastically profitable trade for 2013 and many shorts will look at the recent price action and decide to actually book those profits before they slip away.
Remember the old adage in trading: Bulls make money; Bears make money but Pigs get slaughtered.
In looking at the chart there are two things to note. The first is that HUGE VOLUME that I have noted on the chart when gold went back down and RETESTED the recent low of $1210 on that payrolls number. As mentioned in a post that day, the price action caught my attention as it portended a possible exhaustion day of the bearish leg lower. Gold however was unable to extend past the initial resistance level noted on the chart which would have confirmed that $1210 region as a double bottom on the chart. It did so today however and that needs to be respected.
I have made some annotations on the price chart. Today's move higher does open the door to a move up towards what will be stubborn selling resistance near $1290 - $1295. Bulls will want to see gold maintain these strong early-session gains however as the day wears on to give the market a realistic shot at such a scenario.
If this move is for real, we will not want to see the rally being losing steam as the day drags on. That would indicate that the short covering burst is failing to attract FRESH NEW BUYING.
Also helping gold is the fact that the HUI has managed to recapture the 200 level.
I am noticing that interest rates are moving lower once again as traders dial back expectations on the timing of any tapering. That is why the Dollar is seeing selling pressure and why gold is moving higher as a result. Recent action in interest rates reveal that rising rates on the long end of the curve have tended to bring selling into gold. In the absence of any widespread inflation fears, traders have tended to see this as a reason to sell gold.
We'll keep monitoring price action and see if we can decipher what the market is thinking.
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