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Why a Gold Spike Is Coming

Robert George Young | Photographer's Choice | Getty Images

June gold futures have been in a tight consolidation pattern and appear poised for an explosive move, but in which direction?

Based on several global factors, I'm inclined to believe that the direction of the move will be higher. The dramatic down move in the Japanese yen, which has been a major factor in gold's weakness, seems to have lost momentum, as the markets have already priced in massive accommodation. A similar story has developed in the British pound, as that currency has found a base. The one currency that is not complying is the euro — and although the euro's near-term direction is lower, it shouldn't be able to drag gold down along all by itself.

Contagion risk in Europe could easily be used as a reason to buy gold, as money looks for safe-haven vehicles. And although this hasn't been the case over the last month, the gold market has a tendency to change its mind in a hurry.

If June gold trades up to $1,611, I will consider that a confirmation of further gains, and I will look at a long position with an immediate objective of $1,640. If the June futures trade down to $1,590 on the downside, I will rethink my long bias and return to neutral.


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