by Umar Farooq
Gold is trading opposite to equities with equities breaking out of their trading range. Gold might have some near-term headwinds as is evident from the recent downward move in Gold prices. However, the dollar could act as a tailwind for gold. The moves in gold to the downside and equities to the upside have continued, which has left many gold bulls feeling apprehensive about the yellow metal’s fortunes for 2017. However, the one saving grace that could help gold in the near term is sustained dollar weakness. The U.S. dollar has pulled back from the highs it was printing four weeks ago, and it has also lost the 50-day moving average.
“As gold continues the downward movement over the near term, you will come across many bearish articles in the press. Just remember that sentiment usually matches price. Furthermore, trying to trade this market (especially with leveraged funds) means you have to be an excellent market timer to beat the market. In bull markets, surprises always take place to the upside. We will ride these corrections out. Focus on the slow stochastics (the weekly setting) and don’t entertain selling until they have reached overbought levels. Presently, we are still at around the 35 level. It should go above 80 before we consider selling.” Seekingalpha
“In fact, there are two critical support levels (probably psychological more than anything) that both gold and the dollar are facing. The dollar index looks precariously close to the “100” mark on the dollar index and gold is doing its very best to stay above or at least hold the psychological $1,200 mark. The dollar is crucial because if stocks keep rallying, traders and investors alike will return to that sector on mass. Volume hadn’t been great up until now in equities, but now that the breakout has occurred, investors will believe that stocks will have a new lease on life. This could affect gold in the near term.” Seekingalpha
However, if this possibility is going to succeed, dollar weakness will act as a tailwind for gold. We will undergo a natural correction in gold and ultimately the rally will carry on. In fact, traders and investors who missed the initial launch of gold’s yearly cycle low in last December might get their chance at gold’s forthcoming daily cycle low. Therefore, if you sold on recent downward trend in gold, caution should be exercised here as we could have a few weeks of stagflation or downward movement in price.
So one should wait until midyear to sell and should ride out these daily cycle lows. The intermediate cycle still has 20 or so weeks to go, so we should at least have three to four months ahead of us before this intermediate cycle tops.
by Umar Farooq