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Gold Sits Just Below Its All-Time HI: Could It Move Higher?

As a general rule of thumb, when times of great economic uncertainty grip global financial markets, gold tends to rise, as investors rush into the safety it provides. In times past, investors were able to exchange a country’s currency for a certain amount of gold, but today, in our “fiat” age of currencies, a paper currency is only backed by the government who issues it. This fact has been a major cause of the giant bull market we have seen in Gold over the last ten years. The chart directly below depicts the last ten years of Gold on a Weekly Chart.

It is a commonly-held notion that we are, no doubt, in an overall bullish trend in gold. The all-time HI of $1,260/ounce was hit on June 17th. Since the HI was hit, gold has corrected down to the $1,200 area. Currently, price is putting pressure on the support area at 1185, which is marked by the black support line in the chart below. If sellers can push price below the 1180 level, the next area of strong support is not until 1160. The chart below shows in the small red-shaded boxes how the 1160 level has acted as both support and resistance in the past, and it should offer price support once again.

The Fundamental Picture for Gold

The Bearish Picture

First of all, gold tends to outperform during times of inflationary fears. As the Federal Reserve injected an unprecedented amount of stimulus into the global markets during the 2008 Sub-Prime Mortgage Crisis, many market participants began to fear that inflation could be a major threat. This, in part, led to a continued surge in the price of gold as investors sought the proven price stability of gold. The inflationary threats, however, are not materializing in the United States. Actually, the exact opposite is beginning to be seen as a possibility—deflation. Economic data released out of the U.S. lately is beginning to convince economists, that deflation is in fact much more of an imminent threat than inflation. Because it is now apparent that inflation is not an immediate threat, we are seeing a small sell-off in Gold as more investors are taking profits. After a rather sharp sell-off on Friday June 16th, we could see a further move to the downside next week.

The Bullish Picture

There were two major catalysts for higher gold prices from January through June. First of all, the threat of a possible sovereign default in Greece sent all financial markets, including the [forex market], reeling. Equity markets began to fall, the U.S. Dollar gained incredible strength against risk currencies, and Gold ran up to its all-time HI. Now, the imminent risk of default has subsided since the European Central Bank put a massive bailout fund in place for struggling countries, but the very real possibility of systemic risk still exists. This coming Friday, July 25th, the ECB will be releasing the results of the European Bank Stress Tests. If these results come out poor, or if the market decides the tests were not stringent enough, we could see another leg up in Gold as it attempts to retest the all time HI at $1,260/ounce. A second driver over the last 6 months has been the interest rate projections in the U.S. Economic data coming out of the U.S. last week, including the latest FOMC minutes, further supported the projection that the Federal Reserve will be keeping interest rates exceptionally low for an extended period of time. This should serve to boost Gold prices higher over the mid-term as investors get out of a low-yielding dollar.