The Hindu Business Line : Spot gold may move lower

GOLD prices fell sharply lower to one and half month lows on speculative selling prompted by a rise in the dollar. The dollar rose to a five-month high against the euro on Thursday as market participants interpreted comments by the US Federal Reserve Chairman, Mr Alan Greenspan, as leaning towards a rise in interest rates in the near term.

Although he said on Wednesday that inflation was not yet a threat, the market gave more weight to his comments the previous day, when he said deflation, a major reason behind low interest rates, was no longer a problem.

A strong dollar makes dollar-denominated gold less attractive. Higher interest rates tend to boost the yields of the US assets, increasing demand for the dollar. With trouble still brewing in Iraq, markets have now clearly shifted their focus from geopolitical events, which, was the main driver in this rally, to focus on the US interest rates thereby losing its safe-haven appeal.

Gold prices have moved in line with our expectations till now. A double top pattern is now clear with the previous low at $387-88 levels the next important level to watch. The long term rising trend line point at $396 has been breached in spite of bouncing higher from there to $405 levels.

The fall from there has breached the important 200-day moving average level at $393. Crucial level to watch will be at $387, which also happens to be the Fibonacci 38.2 per cent retracement point 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. This will be followed by a wave "B" to move higher. RSI is in the oversold zone now and a minor correction can be expected due to this. The averages in MACD have now gone below the zero line of the indicator indicating a trend change. Prices are lower than the short-term 9-day EMA at $401.50 and the medium term 25-day EMA is at $408.

Look for a minor correction higher followed by a move lower again. Supports are at $390, 387 and 374. Resistances at $393, 398 and 405 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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