Commodity Trade Mantra

Gold Futures Rise breaks tight range – Needs more to last longer.

Gold Futures

Gold Futures Rise breaks tight range

Gold Futures climbed up for a 3rd day on 26 July on a combination of fresh buying and short covering & also moved higher with the upside move in the Euro. ECB President Mario Draghi’s comments that the ECB would do whatever it takes to hold the Euro together induced further buying in the Euro and most commodities. Though his statement was enough to send weak shorts running for cover, the fact that he had to say this speaks volumes as to the problems Europe has. Such statements may make a mark up for a couple of day’s but these problems will not go away only with assurances of future doings, actual action will be needed to back these statements as issues have almost reached a boil over point in Europe.

Comex Gold Futures for August delivery witnessed a headline driven upside yesterday to $1621.5 & Silver Futures for September delivery rose moderately to $27.78 for the day. The Euro peaked at $1.2330, its strongest level since July 10. A softer dollar tends to underpin all commodities by making them cheaper in other currencies, plus some market participants tend to buy gold as a hedge against dollar weakness. These couple of days has been encouraging for Gold Futures trading. After being in a very tight range and going back and forth repeatedly for weeks, Gold now at least seems to have broken into a somewhat higher trading range, seen earlier from $1648 to $1540. The ECB President’s crucial comments on support for the Euro came at a time when the market is also anticipating further stimulus from the U.S. and China in the close future, factors which are supportive for further rises in Gold Futures.

Weak Economic Data may be positive for Gold Futures:

Today’s U.S. Economic data announcements include  2nd Quarter GDP – Gross Domestic Product, with growth forecast to 1.1% – 1.3% versus  a 1.9% rate in the first quarter & July University of Michigan consumer-sentiment index, forecast to come in at a 72 reading. If the GDP growth rate happens to disappoint as we expect, it will push Gold Futures up to $1648 – $1651 levels & also certainly give more reason for the FOMC to take greater & faster consideration for the QE3. Gold Futures market is also in the midst of a rollover from the August Gold Futures to the October / December Gold Futures. Data on CME Group’s Web site shows that August Gold Futures had the most volume on Wednesday but December Gold Futures had the highest open interest, a very important indicator of market expectations for Gold Futures by the year end.

Gold Futures need more than assurances to sustain Bullishness:

Gold Futures trickled down today as some participants exited to capture profits on the 3 day rises & also on the sentiments that nothing major is going to happen overnight though some upsides were seen yesterday on the assurances by the ECB President Mario Draghi. The Gold Futures Markets have had several expectations, have seen too many assurances but very little action & so the lukewarm response to yesterday’s statements. The same has been on each appearance by the Fed Chairman Bernanke. Bernanke too has always kept the door to QE3 open but has stopped short of providing any clues to the timing of moving in the big announcement. He continued to use past language saying the Federal Open Market Committee (FOMC) stands ready to act, if necessary.

Furthermore, Gold Futures upside also depend a lot on activity in the cash market which has more or less, been lackluster of late. The entire Asian activity has also been lighter lately. Cash markets for Gold have been quite subdued on lower rainfalls in India, the world’s largest consumer of Gold & the expectations of a pick up in activity is also expected to be low as rains continue to play truant but some bottom buying triggers may be seen on the rising INR against the US dollar which makes Gold buying at lower rates lucrative. Gold Demand could recover slightly in India, as INR, the country’s currency recovers some of its recent weakness. The Indian rupee has appreciated considerably, slightly slowing the upward movement in the Gold Futures prices in India, as a result of the high capital inflows of the last few days. The ratings downgrade of Germany, Holland and Luxembourg effectively reduces the global pool of sovereign bonds with AAA ratings and stable outlooks from all three major agencies by 50%. This means that there are a lot fewer options for investors seeking to put their money in quality assets. The dwindling list of quality investment alternatives should also be good for Gold Futures.

Some Central banks may yet remain supportive & be bigger net buyers of Gold though the weakening global economies show alarming indicators of some of these Major Central Banks becoming Net Gold Sellers if circumstantially forced to.

Against this backdrop, Gold Futures traders will continue to wait & watch whether the trend in U.S. economic data remains weak, particularly ahead of a (FOMC) Federal Open Market Committee meeting next week and the annual Jackson Hole Fed symposium in late August.

Fed Chief Bernanke is a believer in using a weaker currency to boost a nation’s competitiveness and get out of a recession, and will therefore use monetary policy as a tool to spur a U.S. economic recovery. He did say that going off the gold standard during the Great Depression helped the U.S. recover from the Great Depression faster than other countries, meaning that debasing your currency is helpful.

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