As Wall Street continues worrying about the winding down of the Fed’s QE3 stimulus program, bond yields around the world have been surging and the dollar has been falling. In the wake of higher yields equity prices have been driven lower. The upshot of higher yields and a weak dollar has been higher gold prices as investors run to safety. Weaker earnings reports in the U.S. and increasing violence out of Egypt have also contributed to increasing demand for the yellow metal.
Since the gold price bottom of late June, the daily correlation between the gold price and the S&P 500 index has inverted once again, i.e. as stock prices have fallen gold prices have risen. Since gold’s price low of June 27, gold futures rallied 12.34 percent while the S&P 500 Index is up only about 3% as gold returns to favor among investors.
While some of gold’s recent rebound can be attributed to the increased desire for safety in light of Wall Street’s worries about the Fed’s money policy, much of the rally is a result of the unwinding of short positions from the last couple of months. There are no guarantees when it comes to near term price predictions, but a test of the nearby chart resistance zone at the $1,420-$1,425 area is a distinct possibility in the immediate-term (1-3 week) outlook. While some analysts are betting on even higher prices if this zone is overcome on the upside (on the assumption that additional short covering will be triggered), I recommend we play it safe and continue to raise stop losses on our conservative long position in the gold ETF in the event that this event fails to materialize.