The rally we saw in gold this year was unprecedented, but after reaching a new record high of $1,227 an ounce in early December, the market has been struggling. Gold has been in an uptrend since the fourth quarter of 2008, but it really began to accelerate in August 2009. It’s time for the market to breathe and consolidate the gains it has made, and the correction may have a bit further to go.
I think gold could fall to $1,085, the 50 percent retracement of the move from about $950 in August 2009 to the highs above $1,200. I think we could even see another $20 to $50 lower from there, until the market starts to form a base. I think the market will then likely consolidate for a while, before moving higher next year. It could be a bumpy ride, but I strongly feel gold will continue to trend higher in 2010.
There have been some improving economic numbers in the past month, but the economy still is not in great shape. The November employment report was better-than-expected, but we are still losing jobs, and the unemployment rate remains in the double digits at 10 percent. Retail sales were also better-than-expected in November, but according to the National Retail Federation, sales are expected to drop one percent this holiday season. In the third quarter, GDP came in at 2.2 percent, lower than expected, and in the 12 months through June 2009, the economy has shrunk 3.8 percent.
What I’m interested in seeing is how the retail sales and job numbers will look after the new year. I’m not convinced the global economy has fully recovered from the recession of the past year. And, I don’t see the U.S. dollar gaining a lot more ground considering the debt load our government has taken on. I think macroeconomic factors are likely to create a bullish environment for gold in 2010. Gold has taken a different dynamic. It’s not just a commodity. Governments around the world are using gold to back their currencies.
Keep in mind that holiday markets can influence trade, particularly in strongly trending markets. We saw the first major correction in gold take place the weekend of the U.S. Thanksgiving holiday, when gold fell about $60 an ounce. The move was likely exaggerated due to light volume. We may be seeing similar activity heading into the Christmas and New Year’s holidays. Also, at the end of the year, a lot of investors will clear out their books, wrap up trading and go out flat. So we do see liquidation and profit-taking.
The current downtrend in gold and uptrend in dollar should even out and reverse back. If you are looking to trade gold futures, I recommend waiting for the market to consolidate a bit to get back in, but gold is never really a bad investment to have if you are long-term bullish.
Commodities other than gold have also seen strong rallies this year, so watch these markets too for possible corrections, which could be severe. In the past couple of weeks sugar hit a 28-year high, orange juice a 23-year high, and cocoa a 30-year high.
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