Gold prices are stronger today-a lot stronger. Spot gold prices are up well over $20 per ounce and look poised to press their gains. Was a bottom put in on Friday when the market swooped down to fresh three year lows? It is impossible to say. What is appearing more and more likely however, is a larger rally in gold prices.
As we have discussed in previous posts, the gold market has come a very long way in a relatively short period of time. The gold market has been simply surrounded by extreme pessimism for several months now. Gold has been on the news and talked about in the media more and more in recent weeks.
All of these things could indicate that the selling may be over, at least for now. Markets have a tendency to punish late comers, and this time around thus far appears to be no exception. In fact, the short gold trade has gotten so crowded that we feel caution should be the order of the day for investors who are still short the market.
We feel that gold prices could easily rally over $100 or more on short covering. In addition, physical demand has picked up a bit and that will likely lend support to gold prices. Essentially if the gold market is going to continue its downtrend, the market must relieve the oversold condition it is currently in in order to do so.
More political unrest and rioting in Egypt may also effect gold prices. Should the situation there continue to escalate, gold may benefit from a safe-haven bid and also squeeze more shorts out in the process.
Over the weekend, investors got the latest reading out of China on its purchasing manager’s index. The reading came out at 50.1 which does show expansion. Stocks are rallying today along with crude oil prices. The U.S. dollar index is relatively flat today and does not appear to be much of a factor in today’s dealings.
The markets will now shift their attention to Friday’s non-farm payrolls report. As one of the biggest if not the biggest economic reports of the month, this data will likely determine if stocks continue their march higher or not. In addition, the data could have a large impact on the dollar and could reignite more debate about when the fed will begin to taper. This is a holiday shortened week due to the 4th of July holiday, and thus trading has the potential for additional volatility.We are expecting more upside in gold prices however, and will continue to monitor demand closely.
