HardAssetsInvestor

June 12, 2012

Buy Dips Of QE3-Reliant Gold Below $1550, Sell Rallies At $1640

Details

We offer our latest analysis on the precious metals market.

Gold prices continued to see volatility this past week, as prices fell precipitously, only to then bounce back days later. In the last edition of Precious Metals Monitor, we characterized the short-term gold trade as essentially a bet on a third round of quantitative easing from the Fed. Thus, it was unsurprising when the yellow metal fell sharply following Fed Chairman Ben Bernanke’s testimony last Thursday, in which he failed to hint at any such forthcoming stimulus at the central bank’s next meeting on June 20.

In the past couple of days, however, the QE3 trade got a shot in the arm amid familiar sovereign-debt concerns across the Atlantic. Spanish 10-year bond yields spiked to euro-era record highs near 6.83 percent amid concerns about the country’s banking sector, despite receiving a 100 billion euro bailout only days ago.

Gold has also benefited from safe-haven buying ahead of Sunday’s Greek parliamentary elections — which could ultimately decide whether the country remains in the eurozone. If those elections on June 17 usher anti-austerity politicians into power, the probability of a financial shock and subsequent monetary easing by the Fed, ECB and others, increases.

However, just as we saw during the financial crisis of 2008/2009, during periods of intense risk aversion — as would be the case in the event of a Greek exit from the euro — gold could fall precipitously before it rebounds. Thus, in our view, the short-term risks outweigh the short-term rewards.

How gold will react to various economic outcomes is highly uncertain and the metal has not demonstrated consistency in playing the role of safe haven over short-term periods.

We suggest a nimble trading strategy of buying dips below $1550 (with a stop near $1520) and selling rallies near $1640 (with a stop near $1670).

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