GOLD TODAY – Fledgling rebound scuppered by dollar strength

Otmane El Rhazi from The Bullion Desk.

Short Term: Medium Term: Long Term: Resistances: R1 1204 UTL R2 1220 Rebound high so far R3 1255.40 Oct high R4 1307.90 Jan high R5 1310 Long term RL R6 1323 Aug peak R7 1345.30 July peak R8 1388.70 March & 2014 peak Support: S1 1210 Former neckline S2 1204 UTL S3 1199 61.8% Fibo S4 1183.70-1180 Former triple bottom S5 1167.50 Recent low S6 1131.60 Low so far Stochastics:Bullish Legend:R/SL= Resistance/support line UTL = Uptrend line BB = Bollinger band Fibo = Fibonacci retracement line Technical Comment Analysis The pullback from $1,300 seems to have run its course. Gold in recent days has attempted to rebound but the rebound is now being consolidated, with prices holding around the UTL. The January rally was strong – it ran out of steam ahead of the long-term RL that joins the tops of the three past significant rallies and the 100 WMA (not shown) so it is not surprising that there has been considerable resistance in the high ground and that prices have needed to consolidate. But the pullback has been severe, although support has been found around the UTL, with only short-lived spikes seen below there. The stochastics have been bouncing along in low ground but are now working higher again, which supports the view the pullback may have halted and that a rebound may start. A move up through $1,220 would look constructive again. Other factors to watch Ironically, when the Greek debt and bailout were in focus, gold prices were under pressure; now that a four-month deal has been agreed, gold prices have firmed. There seem to be two reasons for this: first, the Fed seems in no hurry to raise rates (but as we saw yesterday, a stronger-than-expected US core CPI raises questions about that); second, the rebound in oil prices, with Brent crude recovering to around $61 per barrel from a low of around $46.50, is providing some support. A rebound in oil could prompt investment back into commodity baskets. A later Chinese New Year this year and depressed prices have bolstered physical purchases – retailers stocked up ahead of the holiday period. Having restocked, physical demand may wane in the near term but… …with India widely expected to cut its import duty in the budget on February 28, there is potential for a rebound in its imports. Although the Fed may be on hold, the market does not seem to feel that the US dollar has run ahead of the fundamentals. So dollar strength, in the absence of any pick-up in geopolitical risk, is likely to weigh on gold prices. If anything were to make the dollar correct, we would expect gold to respond bullishly – broad-based currency weakness prompted by ultra-easy monetary policy could well lead to further monetisation of gold as currencies undergo competitive currency devaluation. In the near term, should New Delhi reduce import duties for gold, there could be considerable pent-up domestic demand that could tighten the physical market at a time when deliveries of gold from Shanghai Gold Exchange vaults are up 18 percent so far this year on the same period of last year. Conclusion Gold’s pullback since the January high has been severe but prices are still well above the November/December lows. Overall there are still many aspects of the global market to prompt concern, as record low bond yields show. (The notion that investors are prepared to accept negative yields strongly suggests they are looking to invest in safe havens). Perhaps gold offers a good safe haven at these price levels, considering the potential for currency devaluation. High debt and competitive currency devaluation may well lead to further monetisation of gold, especially as the EU embarks on quantitative easing next month, which should help underpin the market. In the short term, any relaxation in India’s import duties could provide a fillip for gold. All trades or trading strategies mentioned in the report are hypothetical, for illustration only and do not constitute trading recommendations.

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