Gold can not hold above 1,600$/oz, consolidation likely

At the beginning of last week, gold had surpassed the psychological resistance at 1,600%/oz and reached a new record high at 1,606$/oz on July 18. However, gold could not defend the gains and ended the week at 1,598$/oz, only a slight gain compared to the close of the preceding week. Fundamental as well as technical factors suggest that gold might be in for a consolidation. It could not be ruled out that gold retraces one third to one half of the gains made since the start of July.

The US is still facing the risk that the US Treasury might default on its outstanding debt. The tea party fundamentalists are not moving even one inch and insist on their demands. However, reaching a compromise requires that both sides make some concessions. As part of the Republican Party is opposing a compromise, a failure to increase the debt ceiling before August 2 is a rather likely scenario. While many bond market investors are still optimistic that a default of the US Treasury would be avoided by an 11^th hour compromise, the probability for such a scenario is not negligible. The rating agencies already announced that in this case, they would immediately rate US Treasury paper down to default status. This is providing gold some support and argues more for a consolidation then for a stronger correction.

In Europe, the situation has eased considerably over the week. Finally, stubborn German chancellor Merkel recognized that her demands were not acceptable. France president Sarkozy convinced her to give up resistance, which paved the way for a compromise at the EU summit. The agreement on a second bail-out package for Greece might not be the first best solution. However, it removes some uncertainty from the market, especially the risk Greece might not have sufficient funds to meet its obligations is September has diminished considerably. Thus, the euro strengthened against the US dollar. We pointed out already earlier that the debt crisis in the eurozone has two opposing effects on gold and other precious metals. On the one hand, the demand for gold as a safe haven increased. At the same time the weaker euro had a negative impact on gold. In the first half of this month, the safe haven aspect dominated. Now we might see the opposite move that the firmer euro provides some support for gold but that profit taking by investors seeking the safe haven might push gold lower again.

The large speculators have increased their exposure in gold further. According the latest CFTC report on the “Commitment of Traders”, the non-commercial increased their net long positions in gold futures in the week ending July 18 by 21,700 to 219,297 contracts, the highest level since mid-December 2010. The deadline for this report was the day gold hit its new all-time high. As gold consolidated afterwards, the large speculators might not have increased their net-long position further. Thus, it would not come as a surprise if the next report shows a small decline of the net-long position held by the hedge funds and CTAs.

The technical situation is not yet bearish for gold, but the indications for a consolidation or correction are increasing. Gold rose along the upper Bollinger band line until it reached the new record high last week. However, gold did not close above the upper band line. A close back inside the band would have been a sell signal. Nevertheless, gold did not rise further along the upper band line, which indicates that gold bulls are exhausted and need a breather. Furthermore, the MACD is increasing now at a slower pace than its signal line. Therefore, the difference between these two lines gets smaller and might turn negative, which would be a signal that the upward trend is likely to reverse. Also the stochastic indicator has crossed in the overbought zone. As the faster line is falling, it is likely that this line might return back into the neutral zone. This event would trigger a sell signal for gold.

Thus, while there is no sell signal triggered yet, the fundamental and technical perspectives spell some danger for gold bulls. It might be too early to reverse positions and to go outright short. However, taking some profits in gold might be worth a consideration.