Gold rally: Flash in the pan or meaningful move?

March 27, 2015 08:55 AM

In end-of-day trading in Singapore, gold prices climbed 0.3% to $1,199.95 an ounce after reaching a high on Thursday of  $1,219.40. Gold surged after news of the bombing in Yemen but prices were capped at the $1,220 level prior to a retracement of much of the initial gains.

Crude oil prices jumped over 6% at one stage and stock markets worldwide slumped yesterday after Saudi Arabia and allies carried out air strikes, which fueled worries internationally that global energy shipments may be put at risk.

The U.S. claims that Saudi Arabia kept some key details of its military action in Yemen from Washington until the last moment. Saudi Arabia’s more aggressive role is said to be in order to compensate for perceived U.S. disengagement. U.S. President Obama’s Middle East policy increasingly relies on proxies rather than direct U.S. military involvement. He is training Syrian rebels to take on the government of President Bashar Assad and this week launched air strikes to back up Iraqi forces trying to retain the city of Tikrit.

All of this has the real potential for "blowback" in the classic sense and risks leading to a hot war involving Russia.

Gold pulled back today as traders took profits after a seven-day rally in the yellow metal. In spite of the price dip gold is expected to rack up a weekly gain of around 1.5 percent. Gold looked overvalued after the 7 days of price gains and the final rally to over $1,219/oz. The last winning streak of 7 consecutive days in a row was in August 2012. Gold appeared overbought and was due a correction.

As tends to happen, gold is now testing previous resistance at $1,200/oz which may become support.

Gold may have a second week of gains today and if this happens we would be constructive on further price gains next week. Momentum is a powerful force in markets and the recent gains could see technical traders pile in the long side pushing prices higher next week.

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About the Author

Mark O'Byrne is executive director of Ireland-based GoldCore.