Gold: Consolidation Is the Best Way Forward

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The prognosis is positive for the New Year, but with the year-end approaching there is a distinct possibility that there is more position cutting to be done. There is increasing resistance at $800, both on a psychological and technical basis.

The recent correction in the gold price has been more a function of profit taking and position squaring than a function of the state of the credit markets. After testing $830 in the final week of October, gold then retreated towards $770 before bouncing slightly as speculative positions were closed. This was extended by selling in relation to the options markets when the November options went off the board, as there has been sizeable exposure at both $800 and $850. It is arguable therefore, that a lot of speculative froth has been blown off the market and that the ground is being laid for a recovery, but this may yet take a little while to develop. The prognosis is positive for the New Year, but with the year-end approaching there is a distinct possibility that there is more position cutting to be done. There is increasing resistance at $800, both on a psychological and technical basis.

Gold's most recent retreat coincided with a reduction in the CboE VIX uncertainty index over the last week of November from just less than 29 to just below 23, coupled with a very impressive rally in the equity markets. The S+P 500 and the Dow Jones both gained 5% in the last week of November, while the FTSE 100 and the Nikkei rallied by 4%. This is partly because Mr. Donald Kohn, the Vice-Chairman of the Federal Reserve, has strongly suggested that there will be another rate cut from the FOMC in December following the combined 75 point reduction that the Committee has put in place since late September. Dr. Kohn said in late November that recent turbulence in the markets might mean that the restriction on credit availability, both in the corporate sector and with respect to private individuals, might be greater than previously imagined and that the risks to economic growth had increased. The fed funds futures markets are now pricing in more than a 90% probability of another cut in rates on 11th December, taking the fed funds target rate to 4.25%.

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