Gold edging closer to a support

June 8, 2015

Gold, Weekly

Ever since the US dollar started move strongly higher last year most analysts have predicted Gold would considerably lower in USD terms. This however has not taken place and the price of Gold has been moving sideways since November last year. This has been a clear sign of relative strength and suggests that there have been underlying demand factors supporting this market. However, price action in Gold since the US Dollar index (DXY) started topping has not supported the Relative Strength idea. A market that has true relative strength bounces sharply higher when factors constraining its move higher are removed.  As soon DXY started to move lower the price of Gold should have rallied strongly and moved beyond the resistances at 1250 and 1300. Instead Gold rallied only 7.3% from March low to May high and is currently trading only 2.17% above the March low. The more dovish stance taken by the Fed Chief Yellen has not been to move the price of Gold higher and suggests that market participants still believe the Fed is not too far from starting tightening on its interest rate policy. Historically the price of Gold not performed brilliantly during the seasons of DXY strength. Another important reason for investors being careful with this market is that the huge rally between 2001 and 2011 that multiplied the value of yellow metal by a factor of 7.5 and sent it to extreme levels that weren’t sustainable. It is common that a market that experiences an extreme rally will correct strongly and be out of favour for a period of time. This has for instance happened with tech stocks (Nasdaq) and Hong Kong listed Chinese stocks (Hang Seng ).

The last time there was a similar rally in the price of Gold was in the 1970s. In August 1976 Gold made a low of 101.50 and in a space of four years rallied approximately almost nine times higher. The recent rally was almost as extreme in terms of price multiples but it happened over a longer period of time. The rally started in 2001 and lasted till 2011. After peaking in 1980 the price of Gold lost almost 75% over the next 18 months. Therefore the 38% correction over the 18 months following the 2011 peak suggests that market participants can better stomach volatility that takes place over a longer time period and that this time around there has been more safe haven buying.

Over the last three weeks Gold has corrected to 1168 support after being rejected from 1224.50 resistance level and 50 week moving average.  The lower Bollinger Bands are not too far and the Stochastics Oscillator is getting oversold. The price of Gold has now reached an area where reversals have happened in the past. This suggests that the downside is getting limited. The nearest support and resistance levels are at 1168 and 1224.50.

Gold, Daily

Gold is now trading between a daily resistance at 1179.90 and 1168.40 after penetrating the support on intraday basis on Friday. The 23.6% Fibonacci level coincides with the 1179.90 resistance. This suggests further weakness before price can turn around and is in line with the current down trend that has been in force since the May high. I look Gold to consolidate and turn between Friday’s low of 1162.60 and March low of 1141.70.

Gold, 240 min

Descending regression channel points to lower prices in Gold as the nearest resistance is at 1179.80 and Friday’s low was below a low from May 1st. Stochastics is not above it’s so called official overbought threshold but it still at levels that have indicated overbought conditions in several occasions since May 21st and supports the view that this market is in a downtrend. Nearest support and resistance levels are at 1162.30 and 1179.80. The 38.2% Fibonacci level coincides with the nearest resistance level while the next important S/R levels are at 1152.40 and 1186.

Conclusion

Despite weakness of the US dollar the price of Gold has failed to rally above 1224 resistance level. The lack of conclusive rallies from over the last two months is not a sign of strength for the long term. This increases the risk of Gold violating the major support at 1131.50. Price is still in a longer term downtrend while the recent sideways move has been an attempt to build a base from which to bounce higher. The recent failure to rally above 1224.50 is a red light that longer term investors need to pay attention to.  I am still expecting Gold to turn higher from or near the 1141.60. If price starts to stall after a small rally and cannot close above 1168 it is an indication to decrease long term Gold positions significantly.

The short term picture (daily and 4h) is suggesting that price not far from levels it could stage a rally from.  However, there are resistance levels above current price which should lead to a down move that would take the price of Gold to levels below Friday’s low. I am expecting it to attract buyers above 1141.70 and attempt a turn around.

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