More Support Building For Gold

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By Chris Shaw

The technical picture for gold continues to look positive, Barclays Capital's technical analysts noting an impressive rally in prices on Wednesday resulted in the completion of a three and a half month head and shoulders base (otherwise known as a reverse head-and-shoulders pattern).

According to the analysts, this suggests the larger bull trend is set to resume, with the pattern targeting a move to new highs at US$1,250 per ounce in coming weeks.

Near-term the analysts are looking for a pullback as risk assets appear poised for a correction (and it seems gold might suffer from this as the USD is likely to benefit from it). The analysts highlight equity markets are vulnerable given the Dow Jones closed below two-month trend line support. As well, gold specifically is now trading close to congestion in the US$1,157-$1,165 per ounce range.

The technical analysts expect gold to outperform its commodity peers as the head and shoulders neckline should limit any pullback. On the upside they suggest a break of the above mentioned resistance clears a path for a move to the US$1,226 December high and beyond.

Any move higher should be supported by speculators rebuilding their long positions as evidenced by the latest CFTC Commitment of Traders Report and as sentiment rebounds from bearish extremes.

On a medium-term view the analysts suggest gold is likely to range trade between US$1,000-$1,225 per ounce before the bull trend resumes, then prices are expected to move to a range of US$1,300-$1,500 per ounce.

Fundamentals are also supportive according to market analysts at UBS. They note that while inflation concerns in the US are easing, the period of slowing inflation in Asia looks to be over. In particular, UBS analysts suggest inflationary pressures are rising in China and India, both countries with a strong affiliation to gold.

In China this fear of inflation has been a major driver of demand for gold from Asia, a trend UBS sees as likely to continue. The broker suggests while 2009 saw the western world buying gold as an inflation hedge, in 2010 this emphasis has made a shift to the Asian region.

ASX-listed stocks with gold leverage include: Newcrest Mining ((NCM)), Lihir Gold ((LGL)), Andean Resources ((AND)), Anglogold Ashanti ((AGG)), KIngsgate Consolidated ((KCN)), St Barbara ((SBM)), Medusa Mining ((MML)), Perseus Mining ((PRU)), Avoca Resources ((AVO)), Dominion Mining ((DOM)) and Allied Gold ((ALD)).

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