Gold – Technical Outlook
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CONTENTS Introduction Fundamental Reasons U.S & Europe Woes Gold Demand to Strengthen Gold ETF’s The “Chindia” Effect Inflation Central Bank Reserves Technical View Moving Averages Fibonacci Expansion Levels Daily Pivot Weekly Pivot
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Introduction Gold is a ubiquitous metal. Its uses vary from a milk man’s wedding to the crown of the queen. The preference for gold ranges from ornamental value to increasing investment options. The prices of Gold are witnessing an unprecedented rise in the recent past. In 2009 the price of gold registered an increase of around 15 percent. In the last three years there has been a 70 percent increase in the price of the yellow metal. Forecasting or predicting the price of gold is not an easy task. There is not a simple formula or chart to consult when guessing where bullion prices will be in 2011. The entire economy is similar to a living breathing organism with many complex parts. Isolating any one aspect is done with the risk of being inaccurate. The price of gold is a difficult number to determine in the overall economic outlook. Below we have stated a few fundamental reasons that are keeping the bullish momentum in Gold and its price forecast.
U.S and European Woes: - The ongoing economic crisis of world’s largest economies has fueled demand of precious metals on the back of safe haven and it is the best hedge against the prevailing inflation as well. U.S downgrade by S&P, the U.S debt ceiling program which may have marginal effect by end of 2012, but for now, it is clear that H2 FY11 will be worse. It is coupled with European debt woes, which is still struggling to recover while recent move of ECB to hold interest rates for a longer period of time has indicated a deep cut in the banking system of EU. With this, the ongoing geo political tensions will also play their part in keeping a bullish momentum in Gold for coming two to three quarters.
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Gold Demand to Strengthen:- Though Overall gold demand fell 17 percent year-on-year in the three months from April to June to 919.8 tonnes, hammered by a sharp drop in investment demand which offset a tentative recovery in jewelry buying. In ongoing Q3, demand appears to have started to recover with increasing concerns about weakness of major global economies prompting investors to buy gold as safe haven while Asian consumers are going splash out on jewelry. In the third quarter, we are going to see strong investment numbers, because of the European crisis, the debt downgrade in the United States and poor economic figures coming from the United States, which have created a concern in investors' mind that we may be heading back to another recession
GOLD
ETF’s:
Large institutional investors, hedge funds and pension funds are
making large allocations to gold, as are individual investors. The proliferation of goldfocused exchange-traded funds (ETFs) bears this out. The SPDR Gold Trust (GLD), the world’s largest physically backed ETF with over 1,120 tons of the lustrous metal, is one of the largest holders of gold bullion. Individual investors have never had an easier avenue for owning gold. Gold-backed exchange-traded funds (ETFs), which experienced an 82 percent plunge in gold demand in the second quarter, have seen very large inflows in Europe and the United States at the beginning of the third quarter.
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The “Chindia” effect: Economic uncertainties will hit gold jewelry appetite in western markets where consumer demand has already weakened, But jewelry buying in India and China -- which together account for 55 percent of global jewelry demand -remains very strong in the short and longer term as the number of wealthy people is set to grow there. Demand for gold bars and coins has been growing in Asian markets with concerns about inflation and a limited offer of alternative investment instruments pushing Indian and Chinese consumers to buy these gold products. Also, coming months we will see festive buying in India ahead of series of festivals and their major fest, Diwali, which could support further buying in physical market.
Inflation: The present stock market panic sent stock and commodity prices including the price of oil are more of a panic. And that launched the big debate about whether inflation or deflation would ultimately carry the day. Keep in mind that since 2001 – under benign price inflation of roughly 2.5% – gold has managed to rise about more than 400%. Meanwhile, the U.S. Federal Reserve is widely expected to keep short-term rates unchanged keeping the doors open for Inflation to hamper their economy further.
Central Banks Researves: India’s recent purchase of 200 tons of International Monetary Fund (IMF) gold was the likely impetus that pushed gold up over the $1,200 level in December. But more important is the sea change that has seen central banks morph from net sellers into net buyers of gold. Central banks, which have purchased 198 tonnes of gold to boost reserves in the first six months of this year, have kept buying in the third quarter and are expected to continue this trend later in the year.
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TECHNICAL VIEW Moving averages Moving Averages
20 Day
50 Day
100 Day
200 Day
Daily
$1842.54
$1735.85
$1631.08
$1530.73
Weekly
$1621.50
$1483.33
$1323.26
$1108.45
Fibonacci expansion levels SCRIPT
61.8%
100.00%
138.2%
161.8%
200.0%
261.8%
Gold
$746.13
$1051.75
$1357.37
$1546.18
$1851.80
$2346.23
Daily Pivot SCRIPT
R4
R3
R2
R1
P
S1
S2
S3
S4
Gold
$2044
$1981
$1918
$1887
$1855
$1824
$1792
$1729
$1666
Weekly Pivot SCRIPT
R4
R3
R2
R1
P
S1
S2
S3
S4
Gold
$2243
$2114
$1985
$1921
$1856
$1792
$1727
$1598
$1469
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Short term view
Gold has been in overall uptrend making higher tops and higher bottoms and most importantly in an uncharted territory in which it is impossible to seek absolute resistance in the near term. We have drawn a resistance trend line from May 2006, which it has recently broken and a support line from troughs of Oct 2008. Gold has been in this uptrend channel for quite a few years of which it has given an upside breakout.
Gold has taken solid support of this trendline and made a strong support at $1720 and if Gold trades above this and gives upside breakout above $1900 then can target our 261.8% Fibonacci expansion level of $1950 in the short term while on the other hand if breaks the crucial support of $1720 and it long standing trendline drawn from May 2006, then can slide back to its previous channel and then can trade in a range of $1700-$1450.
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Long term view
On a broader scenario, Gold is in a long term uptrend and if we apply Elliot wave theory, it started its impulse wave “A” back in 70’s from $34.95 to $835, due to action to detach US dollar from gold and Soviet intervention in Afghanistan led to the rally in gold to $835 in 1980, where it peaked out and then saw a sharp decline in prices to $251.70 and ended its corrective wave B & then was in downtrend for 20 years, till 2000-2001.
From $251.70, it started impulse wave “C”, which is by character the longest and most fierce
wave,
is in
progress in
Gold
and
it
is
currently extending
itself.
We expect Wave C to be completed in coming few months at around $2300-$2320 which is 261.8% retracement level, based on wave count and Fibonacci projections. The target price of $2300 - $2350 becomes more realistic as it is 1980’s inflation adjusted record price which is just below $2500.
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