Technicals | Apr 14 2010
By Chris Shaw
As the market increasingly speculates on China revaluing its currency, resources analysts at UBS point out such a move is also likely to have an impact on the gold price.
This reflects China's increasing importance in the global gold market, as it is now not only the world's leading gold producer but China has also delivered average annual demand growth for the metal of 13% over the past five years.
UBS notes a revaluation of the Chinese currency would make gold cheaper in yuan terms, something the broker sees as stoking additional interest in the metal. What could also offer support is if any revaluation in the yuan is seen as official acknowledgement that inflation is becoming a problem in the Chinese economy.
This is because of gold's attraction as an inflation hedge, something UBS suggests has been a factor behind gold's additional popularity among Chinese investors this year. In UBS's view, as long as any revaluation in the currency is done at a slow pace, and its forecasts call for a move of 5-6% between now and the end of 2010, the gold price response to a revaluation should be positive.
While this suggests further upside for gold, the technical picture for the metal is less supportive, Standard Bank suggesting the metal is running into strong resistance above the US$1,150 per ounce level.
The bank notes at this price point scrap gold is coming into the market, this at the same time as sovereign credit risk has subsided short-term on the back of new loan support for Greece.
On the plus side Standard Bank notes sovereign debt problems can't be resolved overnight, so there should still be strong support at prices around US$1,130 per ounce. The bank puts current technical support for the metal at US$1,142 per ounce and then US$1,136 per ounce, with resistance currently at US$1,162 per ounce then US$1,178 per ounce.
Technical analysts at Barclays Capital agree a temporary corrective period for gold is likely as a "dark cloud candlestick pattern" on Monday led to further bearish follow-through trading.
Barclays analysts see any correction as a healthy one as it would be an unwinding of currently overbought momentum readings. Assuming prices consolidated above the neckline of a large head and shoulders base near US$1,130 per ounce, it would imply a return to US$1,188 per ounce later this month. The analysts suggest the move upwards should continue with US$1,250 per ounce the next target.
Short-term the analysts at Barclays see the trend line at US$1,143/$1,145 per ounce as vulnerable, though they suggest any weakness should be viewed as a buying opportunity. A close above US$1,166 per ounce is needed to confirm the uptrend has resumed.
