Commodities | Jul 06 2010
By Rudi Filapek-Vandyck
There is a saying which carries a lot of truth: if a market fails to rally on positive stimuli, it's probably an indication all is not well. If my observation is correct, the saying is increasingly being used in relation to gold.
Global risk appetite is clearly in retreat and equities are on an uninterrupted losing streak in June, on top come continued concerns about bank balance sheets in Europe, not even mentioning the concerns relating to what governments might be up to across the European continent.
Yet, gold has failed to rally to new highs, falling back towards US$1200/oz instead.
Commodity analysts at JP Morgan suspect falling growth expectations for the global economy, the US in particular, is what is weighing upon the gold price in June. The logic behind this reasoning is that lower growth inevitably weighs on inflation estimates and since gold is partly a hedge against inflation, et cetera, et cetera.
JPM analysts remain positive on gold's prospects, but in a medium-term timeframe. Shorter term, they suspect gold might be poised for a sharper pullback than what we've seen thus far. How about a renewed test of US$1180/oz, and if support proves incapable of withstanding selling pressure, a further leg down to US$1150/oz?
Sounds but logical to JPM analysts.
In essence, argue the analysts, last week's price action has reversed the technical picture for gold, and it could easily be argued that a pullback is due after a strong bid over the past three months for the precious metal.
A similar philosophy is adhered to at Canadian stockbroker Shaw. The in-house chartist at Shaw reports last week's pullback has now violated a technical support line originating in March. In addition, price charts for gold had carved out a clear “cup and handle” pattern. Failure to follow through in a positive manner now likely means heading further south is but the route of least resistance.
Shaw is now of the view the upper Bollinger Band should become a formidable resistance over the next month as the Band rolls over. As a consequence, it would take a strong surge through US$1260 to reverse the negative outlook for gold.
Adding further to gold's negative technical outlook are the fact the metal has, over the past six weeks, generated a so-called “rising wedge pattern” with negative divergences in the RSI, Stochastic and MACD while gold priced in euro saw “the culmination of a classic blow off”.
Shaw believes gold has once again fallen victim to too bullish market sentiment. Experiences with similar situations for platinum, silver, copper, natural gas, crude oil, wheat and rice over the past decade suggest the 20 moving average is likely to provide some initial support, but gold is now likely to put the 50 M/A to a test.
In case of the first scenario, the 20 M/A at present is at US$1181/oz, in case of the second scenario, the 50 M/A is currently at US$1109/oz.
See also last week's story “A Cuppa Gold”, published on 28 June 2010.