Gold prices could rebound again next week as the underlying fundamentals of the longer-term outlook have not changed, but market watchers said the yellow metal needs to hold important technical chart price levels to resume rising in the short-term.
Prices were lower on Friday and on the week. The most-active April gold contract on the Comex division of the New York Mercantile Exchange settled at $1,709.80 an ounce, down 3.75% on the week. March silver settled at $34.338 an ounce, down 2.43% on the week.
In the Kitco News Gold Survey, out of 32 participants, 22 responded this week. Of those 22 participants, 14 see prices up, while six see prices down, and two are neutral. Market participants include bullion dealers, investment banks, futures traders, money managers and technical-chart analysts.
Despite the sharp break in prices this week, those who are bullish on the metal remain undeterred, saying the long-term fundamentals for gold haven’t changed. Those fundamentals include the ultra loose monetary policy by western central banks and concerns about fiat currency, among other reasons.
Prior to gold’s price break this week, several markets watchers were concerned the rally was on the back of speculative buying as physical purchases weren’t accompanying this year’s price rise. That changed when prices fell more than $80 on Wednesday.
Early indications are that buyers, particularly out of Asia, saw this week’s price drop as an opportunity to add to holdings. Now that the calendar says March there is hope that seasonal trends will hold true as that Chinese and Indian purchasers will return to gold, analysts said.
“It will probably take a few more days for physical demand to really come in with full force. Another test of $1,700 may well do the trick. Physical buyers can afford to be a little more patient at this stage. After all, it is still very early in the month and there is plenty of time for the seasonal trend to kick-in. That prices exhibited a sense of calm after the storm (Thursday) is a good first step,” said Edel Tully, precious metals strategist at UBS.
Bart Melek, head of commodity strategy with TD Securities, also noted strong buying interest in the break, which bodes well for gold’s outlook. “The fact that investors purchased some 350,000 ounces of ETF held gold (now 78 million+ ounces total holdings) on the worst trading day this year, certainly serves as a good omen for later in the year and helps to convince us to continue to stay bullish,” he said, adding that TDS still expects gold to trade over $2,000 later this year.
TECHNICAL CHARTS SHOW SOME DAMAGE
Not everyone is convinced that gold will rebound quickly. Market participants who use technical charts as part of their trading tools are concerned that short-term and longer-term charts are now not so bullish.
Even those analysts who see prices rising next week said gold needs to hold between $1,680 and $1,700 to attempt another move higher.
Darin Newsom, Telvent DTN senior analyst, said he’s watching the U.S. dollar index. Because gold is dollar-denominated, it normally trades inversely to the greenback, so a higher dollar can pressure gold. Newsom noted the U.S. dollar index “has rallied off support and could look to extend its gains next week. If so, April gold could break out of its consolidation phase and move toward a test of technical support at $1,614.10.”
Ira Epstein, director of the Ira Epstein division of The Linn Group, is also a bit cautious regarding gold. He pointed out a pattern of lower highs and lower lows on a monthly technical chart. “What’s clear on this chart is (the) rally from the last break low (of) $1,525 hasn’t resulted in prices taking out the past recent high. If anything, a lower high has been made at $1,790.40. Take this out and the bull move should regenerate. Until then, a trading affair is what is likely to ensue,” Epstein said.
If gold rebounds next week, the first area of resistance is at $1,743.70, which is the 18-day moving average of closing prices on the daily chart, as of Thursday’s settlement. If gold cannot push through there, then it might return to the $1,700 level, he said.
Frank Lesh, futures analyst at FuturePath Trading, said he wouldn’t be surprised if gold spends some time licking its wounds before seeking a new direction and following the foreign exchange markets.
“Gold continues to exhibit a strong correlation to the currency markets and it is no surprise that gold peaked with the euro, and sold off with it as well. Many traders were disappointed with gold when it would not trade up to and through the $1,800 level and profit taking ensued…. I expect some consolidation for now and expect prices to be range bound and sideways for next week, as is usually the case after a move of this magnitude. The currency markets will continue to be the main driver of price for gold,” Lesh said.
Kitco News-Debbie Carlson-March 2, 2012