FxWirePro: Reassessing Gold outlook

In our recent article at FxWirePro, we suspected that the yellow metal would correct to as low as $1155 per troy ounce. We use the word correct as we continue to believe that gold is in a bullish trend. We have been long on gold since the price was 41090 per troy ounce. Our trade is still in positive territory; however, the price of gold has declined from $1375 per troy ounce in July to $1168 per troy ounce as of now.

While we believe the fundamentals are currently coming in place for the yellow metal to rally, the stronger dollar is taking its toll and likely to keep taking a toll over the coming weeks. Since 2011, with the drop in gold prices, the miners have shifted to high-grading, which is to mine the easiest available and highest grades of metal to cut down their cost and the investments to replenish gold reserves have fallen significantly. The discovery of new sources of the metal has been the weakest since 2009. We suspect there could be a supply crunch in the coming days, once the demand recovers. The physical demand and the investment demand both have been much weaker than we suspected and that is largely due to better returns from the U.S. treasuries amid a stronger dollar and lack of risk aversion.

While we continue to believe that the supply fundamentals remain in order for the yellow metal to turn bullish, there could be further drop in the metal price before it becomes acute.

With such outlook, there is a strong possibility that the gold price would break below $1150 area to test $1090 support and further.