UNITED STATES October 08 2014 11:49 AM

NEW YORK (Scrap Register): The fundamentals for gold remain posivive, with a stronger US dollar the main culprit hurting the metal in the last couple of months, said Adrian Day, president of Adrian Day Asset Management.

The greenback was boosted by a growing divergence between the US economies and anticipated monetary policy. Dollar strength lays the seeds of its own destruction.

Day continued, noting this could hurt the US trade picture. The US economy is not so strong that it can withstand a higher dollar; already several Fed officials have expressed concern and if the balance of future economic reports turns soft, one can expect more dovish comments from the Fed.

Meanwhile, fundamentals for gold remain positive, with new mine supply growing at only a moderate rate and good demand expected from China, India and the Middle East, said Day to Kitco News.

Central banks continue to accumulate, with suspicions China is looking to build reserves. He also cited concerned about monetary fragility, easy money around the world, and debt levels increasing even as economic growth slows, making debt service more problematic.

Gold could be close to a turn. The dollar has moved too far, too fast, in defiance of fundamentals. Gold is testing a level where it has found support three times in the past year. And the commitment of traders report, showing over 20% short interest, is also a level from which we have seen strong rallies several times in the past.

“If we break the current level meaningfully, then it could be exceedingly ugly for the next few months. But if it holds, we could see a very strong rally,” Day added.