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Day one: our potential spot gold trade

Spot gold has seen better buying of late after hitting a low of $1240.5 on June 3.

Gold
Source:Bloomberg

Since that low we have also seen two bullish reversals on the daily charts, highlighting that the bulls seem to be in control and that the downside could be limited.

On the four hour and daily chart (below) you can see downtrend resistance at $1287 and it’s this level that interests me. A break could see traders push gold above $1300, even targeting the April high of $1331.

Prior to the downtrend resistance, the 50% retracement of the May to June sell-off seems to be holding up play at $1278, so this level will need to give way.

Looking at various oscillators, the MACD is pulling above the signal line, while stochastics are also gravitating higher on the daily chart. The RSI is also pushing north, but at 53 is at a level that needs to break or we could see a reversal in price.

Fundamentally the situation in Iraq is the main concern and traders have been looking at ways to hedge this geo-political risk. In reality, gold is not the best hedge here and traders have been looking at being long VIX index, short AUD/JPY or long brent/short US light crude (as a pairs trade). If we do see oil continue to rise it will add to energy-related inflation, which, given the current levels of global growth, is really the last thing we need to see. Higher inflation is a positive, as long as it’s driven by wage increases and not energy.

Traders will therefore be keen to keep an eye on proceeding in Iraq, focusing on whether the insurgents from the Islamic State of Iraq (Isis) push towards Baghdad and we see signs of all-out civil war. Signs over the weekend suggests the insurgents’ momentum towards Baghdad has waned somewhat, although they have taken the town of Tal Afar in the north.

So to summarise, we are seeing signs that gold could push higher and I would be looking for traders to buy the trend break. However, a test and subsequent rejection of this level could suggest gold is ready to head lower. I will therefore look at opportunities around that.

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