Is gold’s dip a correction or trend change?

Market Pulse: Sept 26, 2011

Fundamentals

Gold prices corrected downward to a four-week low from their recent all-time nearest-futures (October) high of $1,920.80 an ounce. Bearish factors include:

  1. The surge in the U.S. Dollar Index to a 7-1/4 month high.
  2. Long liquidation pressures as commodity markets tumbled.

Supporting record high gold prices are:

  1. Strong demand for gold as an alternative asset after the recent cuts in the credit ratings of the United States, Italy and Japan.
  2. Safe-haven demand from the European debt crisis.
  3. The Fed’s pledge to keep interest rates “exceptionally low” through at least 2013, which lifts inflation expectations and boosts gold demand as an inflation hedge.
  4. Rising global price pressures with U.S. August CPI at a 2-3/4 year high of +3.8% y/y and China July CPI at a 3-year high of +6.5% y/y.

Fundamental outlookBull market correction — The long-term trend for gold remains bullish, but the short-term trend is bearish on long liquidation pressure and the dollar’s rally. Supportive factors for gold continue to include safe-haven from Europe’s debt crisis, an alternative to flagging stock prices, and extraordinarily easy G7 monetary policies.

Have a prosperous trading week.

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