The Hindu Business Line : Spot gold may head lower

GOLD prices were firm despite the dollar's strong recovery against the major currencies on Wednesday. In spite of the strength in the dollar, gold price managed to close marginally lower due to the influence of firm oil prices and concerns of economic fallout from Hurricane Ivan.

The dollar shot up in response to a positive manufacturing data released Wednesday. Selling pressure in gold is not expected to build over the near term while such uncertainty surrounds the likely spill over effects of Hurricane Ivan on oil prices.

The US trade deficit still remained huge in spite of being smaller-than-expected and inflation falling lower. The dollar weakened on Tuesday, weighed down by a report showing the US current account gap increased more than expectations.

With the FOMC on Sept. 21, markets have factored a 25 basis point raise in interest rates but focus will be on coming months and how the Fed would pursue its monetary policy of tightening which in turn will make a higher yielding dollar an attractive investment and gold an unattractive one.

Gold prices recovered well, but are finding it difficult to cross the falling trend line resistance point at $406-407. Should spot prices find resistance at current levels we can expect a good correction to set in targeting $391 levels. However, a daily close above $408 will see prices headed towards the $420 levels instead.

Our preferred view is to look for prices to head lower. As we have been maintaining in spite of the recent strength in gold prices we continue to favour the downside in the medium term as the price structures suggest a sharp reversal once the resistance levels are tested.

We need to alter some of our wave counts internally; however, the bigger picture still remains unchanged. As per our recent count we are in a correction in the bigger picture after the fifth wave failed at $433 unable to cross the third wave top at $431.50 convincingly.

A corrective wave "a" began from there and ended at $371. This was followed by a wave "b", which now looks to have topped out at $414. A wave "c" has possibly begun from there targeting $365 levels. This will be confirmed after a break of $392.

RSI is in the neutral zone now indicating that it is neither overbought nor oversold. The averages in MACD are still above the zero line of the indicator suggesting bullishness. Only a crossover of the averages below the zero line in the indicator will signal a bearish reversal.

MACD is also showing a negative divergence where prices are making a higher high, which is not confirmed by a higher high in the indicator an important reason for our medium-term bearish call. Prices are below the short-term 9-day EMA at $402.97 and the medium term 25-day EMA is at $402.48.

Therefore, look for prices to test the resistance levels and then head lower. Supports are at $400, 397 and 395. Resistances at $ 408, 410 & 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 of MCX. 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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