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Gold’s rallying — but should investors still be wary?

Metal tries for first yearly gain in three years

AFP/Getty Images

Gold prices creep higher year to date.

Gold on Thursday turned higher year to date, and some analysts say that the metal’s recent moves may indicate an end to its long-term downtrend.

On Thursday, futures prices for the metal GCZ5, -0.87% marked a fifth straight session gain, fueling a turn higher for the year so far, with prices up $3.40 an ounce, or 0.3%, from the last trading day of 2014. December gold on Thursdayrose $7.70, or 0.7% to settle at $1,187.50 an ounce on Comex, the highest price for a most-active contract since June 19.

FactSet

“Both the fundamentals and the technicals have turned in favor of gold right now,” said Brien Lundin, editor of Gold Newsletter.

Fundamentally, the likelihood that the Federal Reserve will not be able to begin rate increases until well into next year is weakening the dollar and boosting gold, says Lundin.

“After the Fed stood down at their last meeting, investors were worried that they knew something we didn’t,” he said. “Now, with recent indications of a slowdown in the U.S. economy, including the very disappointing September jobs number, we’re beginning to see the reality behind the fears.”

Data released early this month showed that the number of new U.S. jobs created in September slowed sharply, climbing by 142,000 versus expectations for a gain of 200,000. On Wednesday, the Fed’s Beige Book, a key report about the U.S. economy, offered a cautious take on the U.S. economy.

Against a backdrop of disappointing economic data, the ICE U.S. dollar index, a measure of the dollar’s strength against a basket of six currencies, has posted declines in four out of the past five weeks. It’s also trading lower this week to date as expectations for a Fed interest-rate increase this year has faded.

Low rates can make gold, which isn’t an interest-bearing asset, more appealing—and a weaker dollar can boost buying of dollar-denominated assets like gold.

Now that gold has cleared some very important technical levels at $1,156 and $1,169, “there is a good chance that the “downtrend has reversed,” said Ken Ford, president of Warwick Valley Financial Advisors. Prices had posted declines in each of the past two years.

Gold may be overbought in the short term, he said, but “the latest move is very positive for further gains into year-end and beyond.”

Caution

But some analysts are more wary of gold’s rally.

‘This is not the first time we have seen such a bullish-looking breakout that has ultimately proved to be a mere short-covering rally.’
Fawad Razaqzada, Forex.com

Lundin pointed out that gold “powered through selling resistance” around $1,160 on Tuesday, then blasted through its 200-day moving average around $1,176 Wednesday.

That move “has greatly impressed traders, who are now eagerly jumping onto the gold bandwagon,” he said.

It’s that “broad-based bullishness on gold” that has him concerned. “Investors who have yet to build a position may want to wait until the next pullback before doing so,” Lundin said.

Fawad Razaqzada, technical analyst at Forex.com, said that while he is “bullish on gold in the short term and as tempting as it might be to think that it has found a bottom, this is not the first time we have seen such a bullish-looking breakout that has ultimately proved to be a mere short-covering rally.”

“If and when gold breaks outside of its long-term bearish channel, with the resistance trend coming in around $1,230/$1,240, then my views might change,” he said.

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