Gold Still Trading Under Pressure

Gold Still Trading Under Pressure

Gold markets have seen a wave of bullish trading activity in recent weeks, as geopolitical tensions in Iraq and the Ukraine have prompted safe haven buying.  When these types of events start to surface, it can seem difficult to assess the length of time traders will be reacting.  But when headlines like this start to emerge, they tend to be much more useful for traders rather than long-term investors.  An example of a temporary market reaction is being seen now, as well.  

Instruments like the SPDR Gold Trust ETF (GLD) and the iShares Silver Trust ETF (SLV) have started to come off of their recent highs as the marginally related geopolitical stories start to lose attention.  “GLD and gold markets as a whole hit their highs during the middle of the week,” said Vlad Karpel, options strategist at TradeSpoon.  “But most of the market was waiting on the monthly Non Farm Payrolls number and the final result put pressure on gold into the end of the week.”

Stocks, the US Dollar

At 288,000, the May jobs number came in well above market expectations.  This signals relative strength in the economy, especially in areas most closely watched by the Federal Reserve.  The unemployment rate was another relative bright point, as it dropped to its lowest levels in six years at 6.1%.  This is also better than most analysts -- and even the Fed itself -- had originally expected, so it was not entirely surprising to see the SPDR S&P 500 Trust ETF (SPY) hold its ground as it marches ahead toward the 200 mark.  

For the Dollar, the reaction was not as positive, and the PowerShares DB US Dollar Index Bullish ETF (UUP) is once again having difficulty gaining ground against assets backed by the GBP and JPY.  Some might expect the improved data to be beneficial for the greenback.  But jobs growth in the world’s largest economy has averaged more than 200,000 for the last five months and this is giving markets the added incentive to sell the Dollar in favor of higher-yielding alternatives.  Better underlying economic fundamentals were helpful for blue chip stocks as well, and with all of these factors showing alignment we can expect some additional upside in names like Apple, Inc. (AAPL) and Google, Inc. (GOOG), as well.

Technical Analysis:  EUR/USD

(Chart Source:  Orbex)

The EUR/USD has been something of an anomaly for the last six weeks, as it has been trading under significant pressure even as the GBP and JPY have reached longer term highs.  The real question here is which market is the leader, and which is the laggard?  A weakening Dollar could bring some positive traction for gold, so we will need to see a clear break of the 1.35 mark in order to side with the Dollar bulls.  As long as prices stay above this area, we can expect a moderately weakening Dollar.  

This would be a positive for gold and GLD but might not necessarily be enough to account for direction of the broader trend or the changing fundamental picture.  Interest rates are still going to start rising, and this will continue to be an obstacle that precious metals traders will be forced to deal with for the next few years.  The interconnected nature of each of these markets is experiencing changes now, so it is not entirely clear that gold and silver will be able to command their previous positions as safe haven assets.  Recent market moves suggest that the total impact of geopolitical effects is transitory in nature, so traders will need to see the difference here before deciding to enter into long or short term positions.   

For more information on options strategies and trading signals, visit TradeSpoon.com.