Make It or Break It Week for Gold

February 04, 2009 | By: Brad Zigler

Gold's medium-term trend – that is, the arc scribed on the monthly and weekly charts – is down since the peak reached in March 2008. The near-term chart, however, shows a rather nicely developing rally from gold's October lows. The rally, however, could stall if the nearby COMEX contract can't close out the week above $931. Even then, there's resistance at $939.60 to overcome.

COMEX Gold (Feb. '09)

Backing and filling is not uncommon in a trending market, so the intersection of chart trend lines may only matter to technical wonks (okay, I admit to some wonkishness). Still, there's something more at work, something more fundamental.

Have you noticed the shape of the gold forward curve recently?

The curve is the ladder of prices for forward sales and swaps determined by the London gold market makers; much the same as the stair-step pricing you'd find in the COMEX gold futures market as you go further out in the delivery calendar.

The spread between nearby and distant forward rates, loco London, has been widening as gold lease rates have fallen. The interplay between lease rates and forward premiums is a supply indicator. Low lease rates and high forward premia signal a plentiful supply of metal. This can stem from either forward buying of metal or an increase in the supply of gold liquidity in the spot market.

More supply would be inconsistent with the rising price trend in February gold COMEX futures.

London Gold Forward Rates

That make's Friday's COMEX close a critical indicator of gold's near-term prospects. Keep the number $931 in your sights for Friday.

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