News and gold strategy

Gold Upward Momentum Continues for Fourth Straight Session

Gold Ended Sharply Lower: “Sell the News” Kicks In as QE2 Approaches Closer

28 Oct 2010 1st resistance 2nd resistance 3rd resistance
Today’s resistance US$ 1339 1354 1364
1st support 2nd support 3rd support
Today’s support US$ 1315 1304 1290
Today’s pivot point US$ 1329

The Day’s Story:
Spot gold ended sharply lower as U.S dollar continued to bounce back from its recent losses and pace of profit taking picked up after metal’s sharp gains in recent months. Most of the losses in precious metal were due to dollar’s strength as market has started to realise that QE2 may not be as large as previously thought and FED may employ its next monetary easing in a way that it stretched over several months with lot less amount compared to QE1 of 2 Trillion dollars. This view was confirmed by a report in Walls Street Journal that the Fed Reserve could be more cautious than previously expected in its stance on quantitative easing. Gold is still up by 22% this year and looks set to record its tenth annual gain and despite recent U.S dollar short covering rally, gold’s medium to long term outlook remain bullish according to many market analysts.

Major U.S. stock indices were mixed at the end of their Wednesday session with DOW and S&P500 marginally down while NASDAQ ended in green mainly due to some positive earnings from Tech sector. Stronger than positive earnings from Broadcom Corp, JDA Software Inc. and Compellent Technologies Inc. helped NASDAQ to rally in the final hours of trading and lead the broader market to retrace from its low points before the end of the session. Better than expected data in which U.S manufactured durable goods orders rose by 3.3% against expected 2.5% and September new home sales rose by 6.6% against market expectation of 4.2% could not convince traders to buy stocks. The reason for sell off was mainly because of market tamping down its expectations of next week’s QE2 announcement. Analysts also believe various markets have gone up too far too quick in recent weeks at the back of the news of new stimulus package and much of it have already been priced in and market is due for a healthy correction as a result. Oil prices suffered as data revealed that U.S oil inventories rose by 5 million barrels. Declines in Crude Oil also affected the commodities across the board. In Europe stocks also ended lower for second day in a row mainly due to the weakness in the mining sector.

U.S dollar stole the show once again in yesterday’s trading as it continued to bounce back after sharp losses in recent months as market expects much smaller stimulus package in next week’s FED meeting than its earlier

expectations. Better than expected U.S home-sale report also lifted the dollar index up later in the U.S session. Despite recent gains by greenback, it’s near term technical outlook remains bearish and that is a bullish factor for price of gold which moves in opposite direction to dollar due to their inverse correlation relationship as a weaker dollar makes dollar denominated assets more appealing to holder of other currencies. Gold losses were mainly due to dollar gains in yesterday’s trading although some profit taking also contributed to the demise as traders locked their profits after strong gains in recent months. Gold has been consolidating at current levels for last few sessions and expect sideways movement until FED releases details about much anticipated fresh round of monetary easing package. U.S Q3 GDP is to be released on Friday and that could move the prices of U.S dollar and Gold as a result, in which direction will largely depend on the data and market interpretation to those numbers. Further declines could be expected if gold manages to break below $1314 level until then but $1300 level will provide a strong support to gold prices at least for now.

Gold price came under selling pressure right from the start after peaking to its intraday high of $1343.4 very early in the session. Gold quickly gave away its minor gains during Asian session and fell deep into red territory during Asian trading hours. Gold found some support early during European session and pared some of its losses. Gold extended its losses soon after mid European session and just before the U.S economic data filtered in before markets in U.S opened for their trading day. Yellow metal was not favored with North American market open and fell deeper to its intraday low of $1318.8 an ounce in the morning session of U.S trade. Gold however, managed to erase some of its intraday losses during remainder of U.S session and closed at $1324.9 an ounce for the day.

Other Metals:
Silver futures for December delivery closed down 43.0 cent to $23.40 an ounce on Wednesday.
Platinum futures for January delivery fell $25.90 to $1,678.10 an ounce on NYMEX.
Palladium futures for December delivery fell $6.30 to $619.15 an ounce.
December N.Y. Copper closed down 9 cent $3.77 a pound on Wednesday.

Gold (News and Views):
December Comex gold closed down $16.00 at $1,322.60 an ounce on Wednesday.
The London P.M. gold fixing was $1,324.50 on Wednesday compared to its previous P.M fixing $1,329.50.
The world’s largest gold exchange-traded fund, New York’s SPDR Gold Trust, said its holdings stood at 1299.177 tons on October 26 unchanged from previous day.
The dollar index, which measures the U.S. currency against a basket of six major currencies, rose 0.42 to 78.07 on Wednesday.
Crude Oil for October delivery rose by $0.61 to settle at $81.94 on Wednesday on New York Mercantile Exchange.
Gold hit its true peak on Jan. 21, 1980, when it rose to $825.50 an ounce. Adjusted for inflation in 1980 dollars, that translates to an all-time record of $2,184.08 an ounce, in 2010 dollars.

Assets of the metal in exchange-traded-products declined 0.28 metric ton to 2,096.13 tons yesterday, the eighth straight drop, according to data compiled by Bloomberg from 10 providers. Holdings are up 17 percent this year and reached a record 2,104.65 tons on Oct. 14.
Analysts cited metals weakness related to concerns among U.S. regulators about market manipulation. The U.S. Commodity Futures Trading Commission said there had been attempts to influence silver prices, but gave no detail on the status of a probe into price manipulation in silver that started in 2008. (Reuters)

Factors Affecting Gold Price Yesterday:
The greenback is holding strong, and there is little other news (for gold)," said Andrey Kryuchenkov, analyst at VTB Capital.
U.S. GDP data on Friday will be key for the dollar and consequently for gold, he said, "but it is really down to the FOMC".

Global equities and dollar-based commodities are undergoing a collective profit-taking retracement in direct correlation to a bounce in the U.S. dollar against most other currencies, says Janet Mirasola, managing director of metals trading with R.J. O'Brien & Associates. “Much debate is likely to follow as to why the dollar has regained friends, but the fact is that the ‘short’ was both crowded and fashionable and had run its fundamental course. A corrective bounce should not be a surprise to any investors who understand the risk of market action over-extending reality. Commodities are swooning as profit-takers start to look now towards month-end and all-important U.S. GDP data due on Friday.” Gold, copper and crude oil are all softer, with psychological support levels of $1,300 an ounce, $8,000 per metric ton and $80 a barrel, respectively.

"Despite better than forecast consumer confidence and Richmond manufacturing data, the recovering dollar weighed on risk sentiment over the course of the day as U.S. equities swung between positive and negative," Fast Markets research analyst James Moore said in a daily note.

“The strength in the dollar is causing people to sell first and ask questions later,” said Adam Klopfenstein, senior marketing strategist at Lind Waldock in Chicago.

Wall Street may have “overplayed” its expectations of quantitative easing judging by Wednesday’s swift negative reaction to The Wall Street Journal report, analysts at MF Global said in a note to clients Wednesday.

The expectation of a more gradualist approach on quantitative easing by the Fed has led to this pullback," said James Steel, chief commodity analyst at HSBC.

Gold Future Outlook:
A report in the Wall Street Journal, suggesting that U.S. quantitative easing may not be as great as some expected, is playing a role in the bounce in the U.S. dollar, which in turn is behind some of the weakness in commodities such as crude oil and metals, says MF Global analyst Edward Meir. The Journal article suggests

that the Fed is likely to unveil a Treasury-bond purchase worth a few hundred billion dollars spread out over several months, far less than nearly $2 trillion during the financial crisis. “Judging from the negative reaction thus far, it is fair to assume that prevailing quantitative-easing parameters may have been overplayed in recent weeks, as both the amount and the phased-in nature of the current proposal is falling somewhat short of expectations,” Meir says. He notes that MF Global is not surprised by the turn of events, after cautioning that a “sell-the-news” type of action may have been imminent. “We suspect that the selling may have somewhat more room to run now that it has started, but just as we saw in the aftermath of the China rate hike, the correction may prove to be relatively short-lived.”

“The longer-term question will be on how much of the Fed’s action has already been priced in,” said Tom Pawlicki, an analyst at MF Global Holdings Ltd. in Chicago.

“With the Fed poised to print more money, we expect dips will be viewed favorably by investors, with longer-term concerns about inflation and debasing of fiat currencies,” said James Moore, an analyst at TheBullionDesk.com in London.

Earlier, bullion received a boost after a newspaper run by China's Ministry of Commerce said the country should significantly boost state gold reserves to a level equal to that held by the United States, citing a local researcher.
"While the implications of potential QE and its size have monopolized market attention, the China report reminds us that the current mood amongst central banks, particularly in Asia, is to increase exposures to gold," UBS said in a note.

Chart support could be found at $1,319, around spot gold's three-month rising trendline, said Rick Bensignor, chief market analyst at Execution Noble. Prices are further supported around $1,313-14, at the bottom of the Bollinger Band, he said.

Technical Analysis (by Jim Wyckoff):
Technically, gold bulls are fading on a near-term basis and need to show some good price strength yet this week to begin to repair the near-term chart damage that was inflicted last week. Bulls do still have the overall near-term and longer-term technical advantage.
Bulls' next near-term upside technical objective is to produce a close in December Comex futures above solid technical resistance at this week's high of $1,349.50.
Bears' next near-term downside price objective is closing prices below major psychological support at $1,300.00.
First resistance is seen at $1,330.00 and then at $1,340.00.
Support is seen at Wednesday's low of $1,318.60 and then at last week's low of $1,315.60.
Wyckoff's Market Rating: 6.5.


Daily Gold and Silver Expected Range:
Gold: US$1308- $1344
Silver: US$23.12 - $24.05

Chart of the Day:
Chart below shows gold prices finding support at rising trendline. A breach of these level will call for 1305-08 level, at lower Bollinger band.
RSI is sitting at 50 level and have much room to travel south before entering to oversold conditions.
MACD study which favored the bullish move until few days ago and was well established in bullish zone indicates a trend reversal and heading towards Zero line. Trend reversal can also been seen by reduced histograms.
Slow Stochastics which broke down badly and gave false signals while at the top of the trend in last few months are approaching towards oversold territory. Stochastics which are more sensitive to price action than RSI and rather lagging MACD indicator appears to signal that current correction may be over soon painting a rather conflicting picture.
Keep an eye on dollar move for further clues as inverse correlation between gold and dollar has been te strongest in a year.