The Hindu Business Line : Spot gold may head lower

GOLD prices plunged lower on comments by the Chinese Premier in an interview with a newswire on the need to tighten its fast growing economy, which has seen China emerge as the leading buyer of commodities.

China was mainly responsible for the surge in demand for commodities in the last one year, which saw many commodities hit new highs. Also, pressuring metals was the continued strength of the dollar against the major currencies. A stronger dollar makes dollar-denominated gold less attractive. In spite of the current decline, gold will continue to be seen as a safe haven investment amid worries about the rising casualties in Iraq, where the US troops fight fierce gun battles with insurgents.

Markets will closely look forward to economic data on the US this week and next week for clues on the timing of a possible raise in the interest rates. Higher interest rates tend to boost the yields of the US assets, increasing demand for the dollar.

Gold prices continue to move in line with our expectations. A double top pattern we identified in our previous updates has broken the crucial support at $388-90 level and now headed for a short-term fall. Failure to breach $405 set the tone for a test of the important support at $388.

Prices have closed below the 200-day EMA now at $393. It has also closed below the Fibobbaci 38.2 per cent retracement point for the move from $322 to $430.40. Next important support lies at $374, again another Fibo retracement point.

Most crucial level to watch would be at $364 and failure to hold support here will change the trend to bearish for gold. However, we believe this correction will throw a good opportunity to do some bottom picking, as the bigger picture has still not shown a reversal yet.

As per elliot wave analysis, we are seeing a failure of the fifth wave of this impulse and a sharp correction currently in progress. Once this correction is over we should see a new impulse begin to higher levels. RSI is in the neutral zone now indicating that it is neither overbought nor oversold.

The averages in MACD are below the zero line of the indicator suggesting bearishness. Prices are lower than the short-term 9 day EA at $396.50 and the medium term 25-day EMA is at $403.00.

Look for prices to head lower again. Supports are at $380, 374 & 364. Resistances at $388, 393 & 398 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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