February Gold traded lower to start the new week and in the process created a new main top at $1806.60. This secondary lower top indicates the trend is getting ready to turn down.
With the market trading lower, the new resistance is the downtrending Gann angle at $1749.10. This angle is falling $16 per day and is likely to control the direction of the market over the near-term. The first target is the uptrending Gann angle at $1671.30. If this angle is broken then look for downside momentum to drive this market into the next uptrending Gann angle at $1607.30.
Problems in Europe continue to take its toll on the gold market. The sovereign debt situation is driving up demand for liquidity like the U.S. Dollar. This is triggering a sell-off in equity and commodity markets. Dollar-based commodities such as crude oil and gold are also feeling the effects of declining demand for risky assets.
As the global equity markets continue to fall, margin calls could trigger a liquidation break in gold as traders step up demand for cash to meet these calls. There may be an acceleration to the downside should the equity market downdraft continue to grow in size.
Aside from these short-term developments, the long-term picture is also beginning to look bleak for gold. As the cost to fund debt continues to grow in Europe, funds that normally would be used to promote economic growth are now being used to finance increased debt costs. This could lead to an economic slowdown and perhaps a European recession. If Europe slows down then the odds of a global recession will increase.
Although central banks continue to print more money to stimulate their economies, gold traders are not looking for the development of an inflationary scenario. Their focus seems to be on an opposite scenario – deflation.
While the short-term outlook continues to point toward a stronger Dollar, there is one scenario that could trigger a turnaround in the gold market. On Wednesday the U.S. is expected to announce the results of a nearly three month debate on how best to reduce the deficit. If preliminary reports are correct and no solution has been determined by the congressional super-committee then the U.S. faces the possibility of another debt rating downgrade. This may trigger increased demand for gold if traders decide the U.S. Dollar is no longer a safe haven.
In summary, look for gold to continue to weaken this week as long as the U.S. Dollar remains strong. In addition, as long as the equity markets continue to trade lower, money may flow out of gold to help meet margin call obligations. Finally, if the U.S. announces on Wednesday that no solution has been reached regarding its budge deficit then the door will be opened for a debt-rating downgrade. This news could weaken the Dollar and send traders back into the gold market.