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Gold Poised For A Big Move

|Includes:ETFS Physical Asian Gold Shares Trust ETF (AGOL), GLD, GLTR, IAU, SGOL

Gold prices have recovered around half of their lost value, following the sharp decline in prices during the second half of June. Gold has been moving around $1,280 over the past few trading sessions and has strong overhead resistance at $1,300.

Downside Risk

If prices are unable to break above this $1,300 level, they are vulnerable to to yet another downward move in the next several weeks. Weak investment demand in most areas coupled with seasonal weakness in fabrication demand, increase the risk of another move down. The period of greatest risk is July and August. If prices fail to break above $1,300 it could signal to the market that there is not sufficient demand at this level and could potentially push gold prices back down to levels seen in late June or early July. If investors hold off on making purchases around $1,200, in anticipation of lower prices, there is potential for prices to slip to $1,150 or even $1,100 in the short term. The decline in gold prices during June following a sharp decline in prices just a couple of months earlier, in the middle of April, has made many investors wonder if there is still more downside potential before they should step in as buyers.

If gold prices decline toward these low levels they should be used as a buying opportunity by investors (NYSEARCA:GLD), (NYSEARCA:IAU), (NYSEARCA:AGOL), (NYSEARCA:SGOL), (NYSEARCA:GLTR). Beyond August, prices may begin rising again, through the fourth quarter of the year. Prices are expected to strengthen during the last quarter as physical demand picks up ahead of the wedding and festival seasons in India. Fabrication demand is expected to rise as well due to seasonal and cyclical strength in manufacturing projected for the final four months of the year. The sharp decline in secondary supply and increased evidence of slowing mine supply growth also should help put a floor below prices by stimulating investor interest.

Investors have not lost interest in owning gold but they have become very price sensitive. Many of the global financial issues that developed around the time of the Great Recession still persist. Investors are aware of this and are interested in having at least a portion of their portfolio in gold.

They were just not interested in adding gold to their holdings at the elevated price levels seen since late 2011. Most investors are likely to view the recent decline in gold prices, with potential for further declines in the near term, as an attractive buying opportunity, but some investors are taking recent price declines as signals that gold prices have cyclically peaked, and should be expected to remain on the sidelines despite any further drops in prices.

Upside Risk

If gold prices do break over $1,300 over the next several trading sessions it could trigger a short covering rally in gold prices. There has been a significant amount of short building over the past several weeks as investor sentiment toward gold had been turning strongly negative. Data released by the Commodity Futures and Trading Commission (CFTC) show that gross short positions held by large non-commercial market participants had continued to build, moving to a record high as of 2 July. This suggests that market participants still were expecting gold prices to decline further from already low levels on 2 July. The most recent data released by the CFTC shows a further increase in gross short positions to a new record high 13.6 million ounces on 8 July. If gold prices break above $1,300 you could see nervous shorts covering their positions, which could propel gold prices back to $1,380 or even $1,420 in the short term. The rally could stall at these levels in the short term as investors and fabricators hold back on making fresh purchases at these levels.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.