The gold market started the trading week off on the right foot. Prices, however, were held below the key $1900 level as the bulls did not show enough force Monday to push past this resistance area. Although Monday saw bargain hunters step into the market to buy the dip, a lack of risk aversion may keep any gains limited and the market vulnerable to selling pressure.
Monday is a quiet day data-wise, but the markets will focus their attention on more data being released Tuesday and with the latest inflation data in the Consumer Price Index due for release Thursday. The topic of inflation has become a major market mover in recent months, and any surprises in this week’s data has the potential to send stocks sharply lower or higher. The consensus estimates for CPI are looking for a rise of .8% with a .4% rise in the core reading (minus food and energy). Any readings above these levels could send investors running for the exits and headed into perceived inflationary hedges such as gold bullion.
Recent data from the Commodity Futures Trading Commission (CFTC) showed that hedge funds and large market participants continue their bullish positioning in gold. The positive momentum may be weakening, however, as buying interest has dipped significantly since that seen in April and May. That weaker interest is likely due in no small part to the fact that prices are higher by over $200 per ounce. Much, if not all, of the initial buying demand may have now been met. This could leave the market in search of a fresh catalyst to continue the rally.
The next page turner for gold could come in several forms. A further rise in inflation, for example, could fuel fresh buying in the yellow metal that could force a challenge of previous all-time highs or beyond. If the stock market were to reverse course and trend lower, equity weakness could also drive investors to seek out alternatives in which case gold may benefit. Any other issue that fuels risk aversion could also set the stage for a gold rally, and any upside in the yellow metal could be met with increased buying as momentum and trend traders climb onboard for the ride.
Despite some drying up of fresh gold buying, the bulls still maintain firm control on the daily chart. The uptrend has been in place over two months and that trend higher may keep bargain hunters on the lookout for any dips worth buying. The bulls will likely target the June highs near $1920 per ounce as a next stop and a close above this level may attract a fresh round of buyers. The bears will try to force prices back down below support at the $1800 level. A close below $1800 could fuel further selling in the market and a significant, fresh leg lower in price.
The week ahead could see some rising volatility in the gold market and could provide important clues about the market’s intentions.