The Hindu Business Line : Spot gold may head lower

GOLD prices crashed to one-month low on heavy selling, as fears of a rise in inflation would see the US interest move higher and therefore, lifting the dollar in the process. The dollar rose against the euro and other major currencies after a half a per cent rise in the consumer price index, with the market expectation in the range of 0.3 per cent.

Markets have now shifted their focus from geopolitical events, which were the main driver in this rally, to focus on the US interest rates based on the economic releases till now. Expectations are galore that the Federal Reserve would tighten interest rates by the summer. This would see interest rates move higher from its 45 year lows and in turn be costlier to carry positions in gold, which has a zero yield, compared to the dollar.

Treasury yields are set to rise even more as the US economy continues to thrive and add jobs, and the latest inflation data suggest the Fed's patience in holding rates steady might not last longer.

Gold prices are moving in line with our expectations. A double top pattern is now more or less clear with the previous low at $387-88 levels the next important level to watch. However, a rising trend line support comes in at $396 and a daily close below this level will set the tone for a test of the $387 levels. Resistance will now be seen at $405.

As long as the important resistance at $413.50 contains the up side, gold should move lower for a test of $387 and possibly even lower than that. The 38.2 per cent Fibonacci retracement level falls at $387 for the move from $322 to $430.40. Therefore, this could be the crucial level to determine the trend for gold prices in the near to medium term.

As per elliot wave analysis, we are seeing a failure of the fifth wave of this impulse and a sharp correction to follow with the first leg of the correction in progress. RSI is in the oversold zone now and a minor correction can be expected due to this.

The averages in MACD are on the verge of going below the zero line of the indicator and a break below the line will signal a trend change. Prices are lower than the short-term 9-day EMA at $413.85 and the medium term 25-day EMA is at $413.75. Look for prices to correct higher initially and then head lower again. Supports are at $396, 392 and 387. Resistances at $405, 413.50 and 416 respectively.

(The author is associated with the Multi Commodity Exchange of India Ltd. (MCX). The views expressed in this column are his own and not that of his employer. This analysis is based on the historical price movements and there is risk of loss in trading.)

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