The Hindu Business Line : Spot gold may consolidate

GOLD prices moved higher in reaction to the dollar's slide in the wake of disappointing trade balance data last Friday. The trade gap widened by a surprising 19.1 per cent to a record $55.8 billion, marking the largest one-month percentage worsening of the trade gap since February 1999.

The data comes as a surprise despite the Fed Chairman, Mr Alan Greenspan's optimistic comments on the economy while increasing rates for second time by 25 basis points to 1.50 per cent last week.

Gold has now regained its safe-haven appeal due to geopolitical tensions, shaky dollar and continuously rising oil prices. Gold is also considered a hedge against inflation. Disappointing US economic data as well as the potentially damaging effects of the prevailing high price of oil, rising twin deficits situation and rising terror concerns will continue to underpin precious metals in the coming sessions.

Gold prices moved sharply higher back into the rising channel it has been moving for a while now. Prices have now tested the near term resistance at $405 levels. Good support will be noticed at $398-400 levels and as long as this level holds we should now see prices testing the resistance points.

Resistance will now be seen at $408-410 now. A break above the important resistance at $409.60 has the potential to head higher towards $423 a long-term falling trend channel resistance point. In spite of the recent strength in gold prices, we continue to favour the downside in the medium term as long as $415 holds.

As we have been maintaining, a break below $380 will see gold headed to its recent lows and possibly even lower to $365-368 levels. As per Elliot wave analysis, we have seen a failure of the fifth wave impulse at $433 and a sharp correction took place to $371, which is wave "A". Wave "B" then started from $371 and possibly ended at $408.75. Wave "C" looks to have begun targeting lower levels, which is still our preferred view.

This view holds good as long as prices do not close above the $415 levels. RSI is in the neutral zone now indicating that it is neither overbought nor oversold. The averages in MACD are again above the zero line of the indicator suggesting bullishness. Prices are below the short-term 9-day EMA at $398.95 and the medium term 25-day EMA is at $397.60. Therefore, look for prices to consolidate and test the resistance levels. Supports are at $402, $398 and $395. Resistances at $405, $409.60 and $412 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. He can be reached at gnanasekar_thiagarajan@yahoo.com.)

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