Gold Ended Second Week in Red After Friday’s Losses
17 Jan 2011 | 1st resistance | 2nd resistance | 3rd resistance |
Today’s resistance US$ | 1373 | 1387 | 1397 |
1st support | 2nd support | 3rd support | |
Today’s support US$ | 1350 | 1341 | 1327 |
Today’s pivot point US$ | 1364 |
The Day’s Story:
Gold extended its losses from previous day on Friday and erased all gains from first three days of the week. Gold also closed below critical $1360 level and sitting just above last week low of $1352. Friday's losses made its second consecutive week of losses for bullion and biggest two-week decline in almost a year. Gold fell as China raised its Reserve Requirement Ratio for banks by 0.5% to curb inflationary pressure in World's second biggest economy. China's move hurt gold's status as an inflation hedge. Gold has also been under pressure due to some better economic data from U.S and lessened worries about Euro zone after successful bond auctions in debt stricken countries. Fed Chairman Bernanke’s remarks about brighter economic outlook a day earlier also took some luster away from precious metal. Gold finished second week of 2011 with 1% losses making it 4.4% decline for first two weeks of this year.
We start this week with a half-day trading due to Martin Luther King's holiday in USA. Analysts believe if gold manages to find support above $1352 then a bounce in prices may be expected. Chinese New Year is also attracting a lot of gold buyers as Lunar New Year is approaching closer and that should also prevent any deep correction in gold.
Stocks in U.S ended marginally higher as investors ignored mixed economic data and focused on corporate earnings. Both DOW and S&P 500 ended their weeks with gains making its 7th straight weeks of gains and longest winning streak since April last year. The Dow Jones closed up 55 points at 11787.38; S&P 500 finished 10 points higher at 1293.24 while NASDAQ rose 20 points to finish its day at 2755.30. All three main U.S indexes recorded double-digit gains in 2010 with DOW finishing 2010 up 11%, S&P 500 13% and NASDAQ 1%. Before opening bell, Stocks got an early boost as reports revealed both inflation and retail sales rose in previous month while Core inflation also came in line with expectations. At earnings front, JP Morgan Chase reported a stronger than expected result for fourth quarter. Stocks in Europe ended mixed with Britain’s FTSE 100 closing down 0.4% while DAX in Germany finished unchanged and France's CAC 40 rose by 0.2%. Asian markets also ended mixed as Shanghai Composite closed down 1.3% and Japan’s Nikkei finished its day with 0.9% losses while Hang Seng in Hong Kong gained 0.2%.
This week brings a lot of important earning reports after Monday’s holiday in U.S. Major financial firms such as Goldman Sachs, Morgan Stanley, Bank of America, Citibank and Wells Fargo are to report their last quarter earnings while tech giants Apple, IBM and Google will also come out with their quarterly results. In addition to that some important construction data is also due this week. Market will also pay a close attention to Chinese President’s Visit to U.S in which among other important issues, Yuan devaluation talks will take center stage.
U.S. dollar index, which measures the dollar against six major currencies ended marginally lower for another day as debt crisis in Europe appear to have eased damaging greenback’s appeal as a safe haven. Euro rose moderately against its US counterpart as it found much needed support from successful bond auctions in last couple of days. Recent gains in dollar were mainly at the back of Euro weakness due to ongoing debt crisis in Europe but now that worries of default and another bailout have calmed, dollar ran out of favor.
After Ben Bernanke’s comments many analysts are a bit skeptical about the completion of FED’s QE2 plan due to finish in June. Some have also showed concerns that FED may raise key interest rates sometime this year due to improved economic picture. Interest rate hike will be a major blow for precious metal, as bullion likes negative interest rate environment when real interest rates are lower than inflation reading in an economy. If that dynamic reverses then the U.S. dollar would be worth more and gold would lose its appeal as a safe-haven asset. Although some emerging economies have raised their rates last year to fight inflation, none of the developed Western economies have taken that step yet due to high number of unemployment.
Dollar and gold’s inverse correlation also took another hit for the second straight day this year as both ended their day in red. 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?
Spot gold has managed to hold well as compared to gold Futures, which suggest strong physical demand mainly in India and China. Both countries are the biggest gold consumers in the world and recent dip in prices has sparked the love trade among bullion investors. Demand for gold is likely to pick up as much of Asia celebrates the Lunar New Year early next month. Gold purchase in China and other Asian nations rises to its peak during Chinese New Year period and that could provide much needed support for bullion prices in coming days.
U.S. markets are closed on Monday and selling gold for cash could also be leading the sell-off charge. Options expiration isn't until the end of the month but volatility could still be the name of the game as traders either let their contracts expire or roll them over.
Yesterday’s Price Action:
Gold price started its Asian session with minor gains and rose modestly in early hours of the trade. Gold peaked to its intraday high of $1377.9 an ounce soon after mid Asian session but came under selling pressure in later part of the session when European markets started their trading session. Gold price remained under pressure throughout European session. Bullion’s losses were deepened as markets in U.S started their trading day. Gold fell to its intraday low of $1354.9 an ounce during early hours U.S trade and found support at that level. Gold spent most part of late U.S session in seesaw mode and finished its day with 1% losses at $1359.4 an ounce.
Other Metals:
Silver futures for March delivery closed down 94 cents to $28.32 an ounce on Friday.
Platinum futures for April delivery rose by $5.20 to $1,816.00 an ounce on NYMEX.
Palladium futures for March delivery fell 22.95 to $790.50 an ounce.
N.Y. Copper for March delivery closed up 4 cents $4.41 a pound on Friday.
Gold (News and Views):
February Comex gold closed down 26.50 at $1,360.50 an ounce on Friday. The London P.M. gold fixing was $1,381.50 on Friday compared to its previous P.M fixing $1,378.75. The world’s largest gold exchange-traded fund, New York’s SPDR Gold Trust, said its holdings fell to 1259.325 tons on January 14th down from 1265.093 a day earlier.
The dollar index, which measures the U.S. currency against a basket of six major currencies, fell 0.10 to 79.06 on Friday. Crude Oil for January delivery was unchanged at $91.40 on Friday 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.Factors Affecting Gold Price Yesterday (Analysts View):
Several successful bond auctions this week by economically shaky southern European countries – Portugal, Spain and Italy – temporarily eased some of the fears about sovereign debt among peripheral nations. That took away some of the safe-haven demand for gold, said Adam Klopfenstein, senior market strategist with Lind-Waldock.
Further asset allocation as investors finished rebalancing commodity indexes also caused some movement out of gold. China’s central bank announced a rise in the reserve-ratio requirement, due to take effect on Jan. 20, which also pressured prices on Friday.
The decline in prices came as “the Portuguese, Spanish and Italian government bond sales succeeded, supported by Chinese, Japanese as well as European Central Bank buying that captured the money needed to survive a little longer,” said Julian Phillips, editor at GoldForecaster.com.
“Gold fell by way of relief that the euro was not going to collapse,” he wrote in emailed comments.
Gold has really been “drifting of late, the victim of trendless economic data and sentiment,” said Brien Lundin, editor of Gold Newsletter, in emailed comments.
“The weak and hesitant economic recovery in the U.S. has served to keep new Western buying at bay, which has left the Asian markets to support gold,” said Lundin.
China’s raising of reserve requirements overnight “had a part to play in dampening the enthusiasm for gold,” said Lundin. “What we’re seeing now is the removal of some of the speculative premium in the gold price.”
“This looks like a typical period of correction and consolidation as gold continues to climb the wall of worry in typical ‘two step forward, one step back’ bull-market fashion,” said Mark O’Byrne, director at GoldCore.
Gold Future Outlook:
But once the impact of the Chinese move fades, the market could start worrying again about the longer-term European structural debt problems. This is likely to become a background factor offering support again, Klopfenstein said.
“That’s going to give gold more flight-to-quality buzz. I think gold is going to approach $1,400 next week,” Klopfenstein said. “Anything from there will be based on market momentum. But I do think we’re going to have a strong rally next week.”
“Until we get a clear resolution of the European debt situation…that will be in the backdrop,” Klopfenstein said. “And as long as that is the case, gold will be well supported. I don’t expect a major drop below $1,350.”
Charles Nedoss, senior market strategist with Olympus Futures, looks for gold to bounce next week on technical-chart factors, since the market is range-bound but currently closer to support underneath the market than the resistance above. Furthermore, he said the dollar index looks technically negative, and further declines would be supportive for gold.
February gold has been turned back lately from chart resistance at the 10-, 20- and 50-day moving averages, which all lie roughly in the area from $1,384.50 to $1,388.50, he said.
But at the same time, the metal is showing signs of holding support on the basis of a weekly chart, Nedoss said. This includes last week’s $1,352.70 low, which roughly coincides with the 20-week moving average around $1,350.
Spencer Patton, president and founder of Steel Vine Investments is keeping an eye on a possible head-and-shoulders formation on February gold charts. He said it’s not a perfect technical chart pattern, but he points to two left shoulder tops from October and November, the head being the high from early December and the right shoulder the late-December/early-January highs.
The neckline of that asymmetrical pattern comes in around $1,360. If that is broken, Patton said prices could fall to $1,300. Beneath that level trend line support is at $1,280.
Those would be good buying opportunities, if prices fell that far, and he expects buying to come in if a break like that occurred.
"The broader range [for gold] ... is somewhere between $1,350 and $1,410," says Jon Nadler, senior analyst for Kitco.com. "A breach under $1,360 could bring it down a further $100."
Daily Gold and Silver Expected Range:
Gold: US$1343- $1385
Silver: US$27.71 - $29.10
Technical Analysis (by Phil Smith):
Chart 1 – The Slow Stochastic is giving us some lovely signals at the moment for the small movements within this long sideways consolidation pattern we are seeing. The latest cross just at the oversold line has edged the market up off lower Bollinger support.
We have formed a number of nice ‘tops.’
Bollinger Bands work well with gold and you can see how the restrain the price action to the up and now to the downside. It is another reason we are seeing some support.
So gold continues to form a long consolidation pattern, which has lasted basically for the final quarter of 2010 as you can see.
Chart 2 – You can see the possible topping pattern I’ve been looking at and we are now sitting on the neckline as marked. Watch for a break below this line.
Turnover has come right down so the market has lost a lot of its momentum and you can clearly see on the second chart that as the turnover came down into Q4 the market has gone sideways.
