Gold Going Nowhere

May 21, 2010 | By | Reply More

Gold IngotThis morning’s trading in Europe saw spot gold falling back to around $1180 where it had languished for most of Thursday. Right now it looks as if gold, with silver, is going nowhere as fears of a second recession mount, worldwide stock markets fall heavily, and the flight to liquidity gathers pace.

Even the fragile US dollar has strengthened, no doubt on the basis of being currently considered the best of a bad lot, resulting in US government bonds in demand as higher prices, meaning lower yields, reflect that deflation is now considered a more likely scenario than inflation.

So what does this mean for precious metals with gold leading the pack?
The short answer is we do not know. The analysts tell us that we can expect strong resistance at $1169 an ounce, a line in the sand from which spot gold has bounced off twice in the last 24 hours.If that doesn’t hold then we could be looking at around $1140 as the next stop off point.

What is seriously clouding the issue is the heavy demand for physical gold, particularly in Europe with reports from usually reliable sources that acute shortages are occurring.

With lowering consumer confidence in Europe and an unexpected increase in unemployment in the US, the scene is set for a continuation of this week’s fall in stock markets and we suppose that we have to accept that the greenback is the beneficiary for the time being.

Our reservation is that it cannot last, leaving only two alternatives.

  • With deflation and continuing low interest rates many will believe that the best place to preserve their capital is to sew into their mattresses and await the good times.
  • Hedge funds, manipulative banks, et al, when not short selling to further aggravate the situation, will also be preserving their capital to strike when the markets are bottoming.

They will feel that there is no need to fear that the dollar is going to bomb in the foreseeable future and they may very well be correct. For our part we are sticking to our precious metal and mining positions and are thankful that we cashed in our Jun $20 calls on SLV that we recommended to our readers earlier, for sufficient profit to see our $19 and $20 June calls costing us nothing and with a couple of weeks left to pick up some steam.

To further our wishful thinking, the current sideways trading of gold and silver may very well present a buying opportunity.

Today’s US trading may give us some clues where gold is going. Beware of shorters covering their positions for the weekend as this can easily give the wrong impression, particularly with the markets in their present state of extreme flux.

Hopefully early next week a definite trend will develop for precious metals.  Bearing in mind that silver is much more volatile than gold, opportunities may unfold to either buy short term put options or longer term calls, both in SLV.

If told we must make a decision one way or the other we would, admittedly with some hesitation, opt to buy SLV $20 strikes October calls, yesterday trading at $0.80 a contract but likely to open lower this morning.

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