Gold Fell Near 4 Month Low Due to Technical Selling
| 28 Jan 2011 | 1st resistance | 2nd resistance | 3rd resistance |
| Today’s resistance US$ | 1337 | 1361 | 1375 |
| | 1st support | 2nd support | 3rd support |
| Today’s support US$ | 1300 | 1286 | 1262 |
| Today’s pivot point US$ | 1324 | | |
The Day’s Story:
Gold came under severe selling pressure during U.S session and fell below a critical support level set on October 22 last year. Gold found a mild buying support after worse than expected initial jobless claims and durable goods orders but risk-on-trade took the luster away from precious metal. Weaker dollar couldn't bring the bulls back in the ring as bullion met the same fortune as greenback and crude oil on the day. Gold’s biggest Exchange Traded Fund SPDR Gold (GLD) was steady but after its worse one day decline of 31 tons on Tuesday combined with lack of buying interest has left extra supply in the market. Sell off was accelerated by Sell Stop orders which are automated orders set by traders to lock their profits or protect their capital if price moves against their desired direction. Gold Futures settled at their lowest level since Oct. 4, when the metal settled at $1,316.80 an ounce.
Some confidence was shaken due to remarks made by ECB President Jean-Claude Trichet at the World Economic Forum’s annual meeting in Davos, that major central banks “are very united in purpose to maintain price stability” and anchor inflation expectations. Inflation touches a deep nerve in the gold market, as the metal is often seen as the ultimate store of wealth and a sure beneficiary of unbridled price increases.
Gold's decline Thursday in the physical market just points to how influential gold ETFs can be. The futures market was also under pressure but not as badly as traders took a breather. It was the spot price though that has to absorb a lack of ETF buying. Bargain hunters along with Asian physical buyers ahead of Chinese New year caved in as price nose-dived because they did not want to be on the wrong side of the market. Gold, which rose 30 percent last year, has already fallen over 6 percent this month as investors took profits and put more cash into assets such as equities and industrial commodities. Gold lost 1.4% last week, marked by big dips and only modest gains in between and looks set to post its first monthly loss since July last year.
U.S. dollar index, which measures the dollar against six major currencies, finished marginally lower making it the fifth straight session of losses. Dollar rose against Japanese Yen by as much as 1.1% as Japan’s sovereign debt rating was downgraded by Standard & Poor. Dollar however couldn’t win the battle against its main European counterpart after weaker than expected economic data from World’s biggest economy disappointed investors. Later, greenback managed to recover some ground following comments from European policy makers. Despite recent successful bond auctions and encouraging economic data, which dented the safe haven demand for both precious metal and dollar, stability in the region is not sustainable and Eurozone is not completely out of the woods according to analysts who believe more needs to be done to win investors confidence. Dollar bears hold a dominant position on technical charts and outlook remains bearish for greenback, which may limit the selling pressure in yellow metal due to their inverse correlation, which has had an erratic year so far in 2011
Gold's inverse correlation with the dollar turned negative once again as both assets ended in the same direction. Dollar denominated assets tend to move higher at dollar weakness as it makes them cheaper for holders of other currencies. But gold and dollar can break away from that norm at times of heightened economic uncertainty, which had been the case for most part of last year.
What Next?
In recent sessions, Gold has suffered from lack of safe haven appeal due to ease in Eurozone debt crisis and in the absence of any other significant geopolitical event. Gold losses were mainly at the back of technical selling and chartists believe it may fall to as low as 1270-65 which is the next important support level now that $1315 level has been breached.
Market will take hint from tonight's U.S GDP data and U. of Michigan Confidence numbers, which will have a great impact on USD and gold prices consequently.
Gold purchase in China and other Asian nations celebrating Chinese New Year has been providing floor for gold prices in recent days and will continue to do so until first week of February when Year of Rabbit kicks off. Cooling in China is another wild card for gold prices. The International Monetary Fund said it expects China to grow 9.6% in 2011 and 9.5% in 2012. If that is too hot for China, then more rate hikes are in the cards, which would pressure gold. But until the country tames inflation, gold still makes a good alternative to the yuan.
Futures traders said February gold could remain under pressure this week as rolling of positions from the February contract to April will still continue ahead of first notice day on Jan. 31.
Yesterday’s Price Action:
Gold price started its first session of the day with mild gains and rose to its intraday high of $1348 an ounce early during Asian trading hours. Gold however, quickly erased those gains and made its way towards south as the session progressed. Downward momentum carried through to European session and gold fell deep into red zone during European market hours. Bullion tried to recover some ground just before the U.S market open at the back of some disappointing economic data but a massive round of selling sent prices to almost 4 months low by mid U.S session. Precious metal fell to its intraday low of $1310.4 an ounce late in U.S session and closed just above its session low at $1313.7 an ounce.
Other Metals:
Silver futures for March delivery closed down 10 cents to $27.03 an ounce on Thursday.
Platinum futures for April delivery rose by $6.60 to $1,803.50 an ounce on NYMEX.
Palladium futures for March delivery rose by 8.90 to $813.50 an ounce.
N.Y. Copper for March delivery closed up 7 cents $4.34 a pound on Thursday.
Gold (News and Views):
February Comex gold closed down 14.60 at $1,318.40 an ounce on Thursday. The London P.M. gold fixing was $1,334.50 on Thursday compared to its previous P.M fixing $1,328.00. The world’s largest gold exchange-traded fund, New York’s SPDR Gold Trust, said its holdings fell 31.262 tons, the biggest one-day fall ever, to 1229.581 tons on January 25th. The dollar index, which measures the U.S. currency against a basket of six major currencies, fell 0.05 to 77.71 on Thursday. Crude Oil for March delivery fell $1.69 to $85.64 on Thursday 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. Investor George Soros, in Davos, said in recent interviews that the rally in commodities may remain for "a couple of years" before the supply/demand picture levels out.Factors Affecting Gold Price Yesterday (Analysts View):
"Investors that are trading tactically in the gold market have taken some profits away from some of the other products," says Will Rhind, head of U.S. operations for ETF Securities. "However, the more strategic long-term investor is still very much part of the gold story."
Part of Thursday's slip could also be related to sell stops, which means that traders sell when prices breach a certain level to lock in gains. "More sellers appeared after option expiration, which is not unusual," says George Gero, senior vice president at Lind-Waldock, "chart selling for now may continue until next week."
“The drop in gold prices [was] greeted by resurging physical demand,” noted commodity strategists at Barclays Capital.
“Barring short-term weakness, we remain constructive on gold over the course of the year given a number of key long-term investment drivers remain intact,” they added.
Gold Future Outlook:
James Moore, research analyst at fastmarkets.com, thinks that gold could test $1,265 if there is another rate hike and if gold plummets through the $1,315 level. "But, we still see the combination of rising inflation; possibility of double dip recession in the U.K., huge deficit issues in numerous economies and the effects of quantitative easing as bullish for gold over the mid-to-longer-term."
“The gold market remains vulnerable to more selling, as the ongoing fear of rising interest rates remains in place. The gold market might also remain off balance because of talk of excessive speculation in commodities at the Davos forum,” analysts at NS Futures said in a note to clients.
Gold has lost more than 7 percent in January, which would be its first monthly decline in six months. Gold's technical picture appeared to deteriorate after breaking below key 50- and 100-day moving averages.
Dennis Gartman, publisher of the Gartman Letter, said Thursday that spot gold's 150-day moving average at $1,307 an ounce should offer support, but he expected bullion to fall further to its long-term trend line at an area from $1,279 to $1,290 an ounce.
Technical Analysis (by Jim Wyckoff):
Technically, February Comex gold futures prices closed nearer the session low Thursday and scored a bearish "outside day" down on the daily bar chart. Serious near-term technical damage has been inflicted in gold recently. Prices are in a four-week-old downtrend on the daily bar chart. A bearish head-and-shoulders top reversal pattern is also playing out on the daily bar chart.
Gold market bulls' next near-term upside technical objective is to produce a close above solid technical resistance at this week's high of $1,352.40 in February futures.
Bears' next near-term downside price objective is closing prices below psychological support at $1,300.00. First resistance is seen at $1,325.00 and then at $1,332.00.
Support is seen at Thursday's low of $1,315.70 and then at $1,300.00.
Wyckoff's Market Rating: 5.0.
Daily Gold and Silver Expected Range:
Gold: US$1285- $1332
Silver: US$26.40 - $27.80
Chart Analysis:
In the first chart below you can see two important support levels broken since the start of this year.
Price has broken below lower Bollinger band badly and both lower and middle bands have turned lower due to recent price action.
We can see MACD is well established in Bearish zone and indicates further losses in the coming sessions.
RSI failed to make a Bullish divergence as price fell below its October levels indicated by white eclipse, which could have been a strong reversal signal, and now heading towards oversold level. RSI looks to fall further towards oversold territory pointing at further price losses.
Expect some resistance from bargain hunters from now to next support level of $1265-70.
Second chart shows Fibonacci levels on the chart. As we can see 61.8 level tried to provide some support in last three sessions but price broke below strongly yesterday and now heading for 1270 or 100% level.
Although charts are suggesting further price falls in coming sessions, a worsening European debt crisis or any other geopolitical event can change the course of the game. So please keep an eye on fundamentals along with charts.
Have a good Weekend.
