Major Risk Premium In Gold

After declining to strong support at $550 in mid-June, the basis August Gold on the COMEX has rediscovered its bull legs and has been rallying as geopolitical risks intensify.

 Gold is a play on market risk. During the past month, the increase of geopolitical risk, including the current Israel-Lebanon conflict, added to tensions in North Korea and Iran, have helped drive investors to buy gold, which continues to be considered a safe- haven investment.

 It is clear that there is a major risk premium in gold at this time. The market is expecting a potential near-term end to the Israel- Lebanon conflict and this is reflected in the current retrenchment in gold prices.

 The near-term technical picture for the August gold is neutral, suggesting some hesitancy on the chart in spite of the tense situation in the Middle East. The Relative Strength is also neutral and not indicative of stronger near-term gains, albeit gold prices can quickly rise if the situation in the Middle East escalates to include Syria and Iraq, both supporters of the Hezbollah fighters in Lebanon.

 Gold will continue to trade on news from the Middle East in the near-term. Recently, the September gold surged to a high of $647.50 before settling lower.

 This market suits day traders with an appetite for risk. On the upside, there is resistance at $665 and $677.50. A break above could see a move to over $700 and to a potential new contract high.

 But, unless the situation worsens, I’m not convinced gold has enough near-term gas to surge higher.

 Rapid run-ups are generally not sustainable in the short-term and any potential trade should be thought out carefully either with stops in place or enter with a small position just in case selling occurs. A break below the 50-day moving average at $637 could see a decline to the 20-day moving average at $618. The 200-day moving average is well down at $571.