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Fundamental Analysis

Gold Rally Gathering Pace

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The war of words between the leaders of the US and North Korea continue to dominate investor sentiment. After the initial stock market sell off, US indices recovered to close at their highest levels on the session yesterday, only for the index futures to tumble again as the new trading day got underway overnight in Asia. The downbeat sentiment has weighed on European indices again. Meanwhile gold and silver continue to print new highs on the week. The somewhat firmer US dollar so far this week has had very little impact on the buck-denominated metals. Thus, gold and silver are higher thanks mainly to their status as safe haven commodities. It would be ideal for the precious metals if the dollar were to weaken again now, which could happen if this week's inflation data from the US disappoint expectations. Today will see the release of the US producer price index while the key consumer price index measure of inflation will come in on Friday.

As with silver, on which I wrote a piece earlier this week, gold is also looking increasingly bullish from a technical standpoint. The last significant sell-off that created what looked like a double top reversal pattern at $1295, has failed to do what the pattern had suggested. Instead of heading lower once the neckline of that pattern broke down at $1215 area in early July, the metal has drifted higher, breaking many resistance levels in the process. Gold's price action thus suggests that the sellers are the trapped traders. If this is the case, the metal will want to go where the sellers' stop loss orders are likely to be resting. I reckon that because of that double top formation, the big buy stop orders will be resting above $1295. I therefore think that gold will probe the resting liquidity above $1295 in the coming days. If there is acceptance above this level then we could see the onset of a much larger recovery, given what looks like a bullish breakout on the monthly chart. For now, that's what I think will happen, but will be quick to change my opinion if we see a distinct reversal pattern or a break in market structure.

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