Following the strong gains for commodities in 2010, much is expected for the major sectors this year, with metals and the energy complex expected to perform particularly well, but judging by yesterday’s performance, perhaps not in a straight line!
If we start with gold, yesterday’s trading ended the session with a wide spread down candle with the precious metal closing at $1383.92 per ounce in the spot market, just managing to find some support from the 40 day moving average. The key point to note from the session was the failure to breach the $1425 per ounce region, which has now set a worrying technical level for gold bulls ( such as me!), where we have now seen a third consecutive failure at this level, which is starting to signal some short term weakness in the gold market. The start of the year has seen a strong performance for equities in general, particularly in the US markets, with the Dow already moving towards the 11,700 region, clearly confirming that risk on appetite remains firmly in place, and it will be interesting to see if the once ‘traditional’ correlation between gold and equities is re-established this year. Traditionally, however, we often see a sell off in gold at the start of a new year, with investors managing their portfolios, and setting their goals and targets for the new financial year, along with profit taking after the long bull run of 2010.
This short term selling appears to be continuing today with spot gold lower once again and currently trading at $1366.99 per ounce, and breaking below all three short term moving averages as we test potential resistance in this area. Whilst this is a dramatic fall, we need to keep this in context, and provided the $1325 per ounce floor remains intact, then bullish momentum is likely to return in due course, but as outlined above, the key level is firmly established at $1425. My forecast for gold this year remains firmly bullish despite the recent falls, and looking at the longer term charts I expect to see gold trading at between $1675 and $1750 per ounce by the end of the year. As such, the start of the year represents an excellent opportunity to build further long term positions, buying into the current move lower, and I am now waiting for a hammer signal on the daily chart to provide an entry point for further long positions. As always, when considering short term extreme moves such as we have seen in the last two days, it is important to retain a perspective view, and a check on the monthly chart will simply confirm that whilst this is a relatively large price move in the short term, in the context of the last 2 years, it is relatively minor.
Silver has followed much the same pattern as for gold over the last two days, pulling back from the high of $31.23 on the spot market, to currently trade at $29.155, with another day of short term bearish price action, with the low of the day appearing to find support from the 40 day moving average, which merely confirms my view that this is simply a short term market correction and not a long term shift in sentiment. The difference between silver and gold on the daily chart is that silver has not developed a potential resistance area higher, unlike gold. Having been in a trade for silver for over 3 years, from mid 2008, I am still holding these positions open, and intend to do so for much of this year, as I expect to see silver hit a high of somewhere between $35 and $40 per ounce, at which point I will be looking to close out these trades. The weekly chart for silver remains firmly bullish, with the rally of the second half of last year having failed to breach the 9 week moving average once, and even today’s sell off as profit taking ensues, has found support from this key level. So the message is simple, don’t panic, and view these pullbacks as buying opportunities for longer term trend trading positions, buying and holding with a view to closing out later in the year, once we achieve the above levels.
Finally let’s look at the picture for crude oil, and just like gold and silver, we saw a big sell off yesterday, with the commodity falling almost $1.70 per barrel in the first real trading session of the new year, and as such breaking below both the 9 and 14 day moving averages as a result. However the low of the day fell well short of the 40 day moving average bouncing off support at the 89.34 region, and indeed this appears to be the case once again today, with a test lower having bounced higher to currently trade at $89.81 at the time of writing. As such, the bullish momentum of the last few weeks remains firmly in place, and with the well developed longer term trend now being established, particularly on the monthly chart with December’s breakout, we can expect to see oil prices climb over the next few months. The technical picture on the monthly chart is very strong, with prices now well above all four moving averages, as we begin to approach the price congestion between $90 and $96, and once this price area is cleared, then the way will be open for oil prices to move towards $100 and beyond later in the year, and in my view we are likely to see the all time high of 2008 breached within the next two years. For the time being however, the current short term reversal lower for oil provides excellent opportunities for buying into the market for a longer term buy and hold strategy. If you prefer a lower risk trade then why not hedge the position in the currency markets with the CAD/JPY which correlates relatively closely. Remember the correlation is positive, so you will need to been long on one contract and short in the other in order to hedge correctly.
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