The Hindu Business Line : Spot gold may correct lower

The rally has also been supported by speculation that Russia and other countries with relatively less gold reserves plan to increase the amount of gold in their reserves, reversing a six-year trend of central banks sales, mainly from Europe. There is still a lot of room on the up side as the metal had supportive fundamentals.

The World Gold Council also painted a rosy picture estimating global demand for gold to have risen 7 per cent in the third quarter. The only negative factor in the short-term, could be the potential fund liquidation being in the last month of the financial calendar year and the substantial long positions held by them in gold derivatives.

Spot gold prices moved higher in line with our expectations. As expected key resistance was seen above $500 levels from where good profit-taking set in. The trend channel seen in the chart above seems to indicate a good possibility of a test of $523-25 levels in the weeks to come. Support is seen at $485-87 and a failure to hold support here can even take it lower to $475. But this correction cannot be construed as sign of reversal, instead should be used as an opportunity to positions longs again.

As per our recent wave counts, the third wave ended at $458 followed by a fourth wave correction in the form of wave A to E, which ended at the recent low of $418 and the fifth wave looks to continue to be in motion after a fractal break $480.60. Initial target for the fifth wave has been met and looks like it could now extend further higher. Ideally, $478-80 should hold for a rise higher towards $505 or even higher towards $523.

RSI is in the overbought zone indicating a correction lower to take place. It has also started showing signs of negative divergences. The averages in MACD are above the zero line of the indicator suggesting a bullish reversal. Only a crossover of the averages below the zero line will signal bearishness again.

Prices are above the short-term 8-day EMA is at $492.30 and the 34-day EMA is at $478.05. Therefore, look for spot gold prices to correct lower and test the support levels.

Supports are at $487.50, 483 and 478. Resistances are at $495, 498 and 508.

(The author is associated with the Multi Commodity Exchange of India Ltd. 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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