The gold bugs are cheering on the street as the June Gold on the New York Mercantile Exchange broke above the $600 resistance level on Wednesday. The break to an intraday high of $601.90 represented the highest gold futures has traded at since January 1981.
The breakout on the charts came after the formation of a sideways Rectangle at between $540 and $580. The near-term technical picture for gold is bullish yet overbought given the buying, so we could see some near-term selling pressure, which is normal in a rising market.
The breakout was accompanied by a positive MACD and strong Relative Strength, both helping to confirm the breakout.
The near-term outlook for gold is clearly bullish. The June contract is trading at above its 20-day and 50-day moving averages of $570.60 and $567.10, respectively. We could see some near- term selling pressure due to the overbought condition but watch for prices to try to hold at around $600. Sustained strength could see an upside move towards $602.40, $607.10, and $632.80.
The positive sentiment in gold is related to the softness of the U.S. dollar and as a hedge against potential inflation. The decline in the U.S. dollar against other major currencies makes gold cheaper for foreign buyers since gold is quoted in U.S. dollars.
Also, given the current world uncertainties and the constant threat of market shocks, gold continues to gain in strength as a safe haven investment.
Going forward in the near-term, I do not advise chasing gold higher but waiting to see how strong the momentum is and seeing if there is decent downside support. If you miss this surge, you may have another opportunity to enter into positions on a potential overbought pullback.
Gold companies that you should focus on are those that do very little forward hedging. Small-cap gold stocks with promising reserves and output could also be of interest due to the possibility of industry consolidation.