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Gnanasekar.T

SPOT gold prices rebounded strongly on Wednesday from Tuesday's slide as the US dollar turned sharply lower. Prices have been extremely choppy in the week, but have managed to stay above key near-term support levels.

One of the strong fundamental factors in favour of gold this year is the increase in mining costs. The strong appreciation of the South African currency rand against the dollar in 2004 has led to a jump in the cost of gold production in South Africa, the world's largest gold producer.

Despite the dollar's wild swings this year, we can expect the currency's weak trend to remain intact and that should propel precious metal prices higher in 2005. There are plenty of reasons to buy gold with uncertainty about the outlook for the US economy, overall dollar weakness and demand growing from the launch of US exchange-traded funds.

Spot gold prices continue to trade in a choppy range with support at $421-422 and resistance at $427-428. Break of this range either side will provide clues on near-term direction. Favoured view is to look for support at $420-421 to hold and test the near-term resistance at $431-32, which happens to be the falling channel resistance point as seen in the chart above.

Only a daily close below $419.25 will negate our bullish outlook and see a possible test of $415. Resumption of the bullish trend can be confirmed only after a daily close above $435. As per our recent wave counts, the third wave ended at $433 followed by a fourth wave correction to $371 and the current move as a fifth wave as it shows characteristics of an impulse wave.

Current fall to $417 is possibly the corrective sub-wave of the fifth wave impulse we are currently in. RSI is in the neutral zone now indicating that it is neither oversold nor overbought. The averages in MACD are below the zero line of the indicator suggesting bearishness. Only a crossover of the averages above the zero line in the indicator will signal a clear bullish reversal.

Prices are below the short-term 9-day EMA at $425 and the medium term 25-day EMA is at $428.25. Therefore, look for prices to consolidate and test the resistance levels. Supports are at $ 423, 420.25 and 418. Resistances at $ 426.50, 428.50 & 433 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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