Gold Is A Haven Within A Global Storm

The gold market is trading at modestly firmer levels in early action Monday, as the U.S. equity market continues to unravel. Concerns about the strength of the Chinese economy, the second-largest in the world, and the government's lack of action to prop up stocks their on Monday has left global investors rattled.

U.S. equities are registering steep declines in early trading and Friday's selling took the Dow Jones Industrial Average into official "correction" territory, as the index has fallen 10% from its recent peak.

Meanwhile, the gold market is acting as a relative safe haven within the global storm. The gold futures contract closed out Friday's session at higher levels on the day and higher levels on the week. The short-term technical picture for gold has improved in recent days. Let's take a quick look at the improving outlook.

Short-term bullish factors for gold:

1. December gold futures are trading above their 20-day moving average (shown in red) and the 40-day moving average (shown in blue) in Figure 1 below. That is a short-term positive signal for the trend following crowd.

2. The gold contract has rallied higher out of a base on the daily chart, confirming a near term bottom at the July 24 low at $1,073.70 per ounce. A new minor uptrend pattern has formed, with a minor series of higher daily highs and higher daily lows seen off the July bottom.

3. The U.S. dollar is plunging. Gold is priced in dollars on the world marketplace and weakness in the greenback is a supportive factor for the yellow metal.

4. U.S. stocks are in a freefall. Safe haven buying should continue to underpin the metal in the near term.

Upside targets and other technical notes:

1. The December gold futures contract is testing 100-day moving average resistance (shown in green) at $1,168 per ounce. This could act as a tough short-term ceiling for the market. Beyond there, the next bullish target lies at $1,207.30, the June 18 swing high, marked at Point A in Figure 1.

2. Daily momentum indicators show gold is overbought. The 9-day relative strength index is above the 70% overbought line, which could open the door to a short-term consolidation phase for gold.

3. Initial support lies at the Aug. 21 daily low at $1,148.50. As long as that holds firm the bulls will have the edge.

Bottom line? For now, gold bulls are in control of the short-term trend.

By Kira Brecht