The Hindu Business Line : Gold could correct lower

Gold futures saw an eventful week, initially reaching a 25-year peak, then plunging lower on profit-taking and subsequently recovering to almost where it fell from. Record-high oil prices and news that core US inflation rose at its fastest rate in a year pulled investors into gold as a hedge against inflation. The dollar fell against the Euro supporting gold, after Russia's finance minister questioned whether the greenback would always maintain its undisputed position as a reserve currency. Also various geo-political tensions due to Iran's nuclear ambitions are underpinning gold.

COMEX gold futures moved in line with our expectations, but stretched further higher than expected. Extreme volatile conditions will make it difficult for investors in the coming sessions. Strong support will be seen at $608-10 now and a break there will take it lower to $591 or even lower to $585. Strong resistance will be seen at $648-50 on the up side now. However, a daily close above $650 will see prices edging higher to $665-67.

Our favoured view is a break higher above $650. Based on the current momentum, we now believe that third wave is still in progress in the bigger picture. A corrective fourth wave can be expected in the coming weeks. RSI is in the overbought zone indicating that it is due for a corrective decline and therefore be cautious of the upside from here. The averages in MACD are above the zero line of the indicator suggesting bullishness. Only a cross-over of the averages below the zero line will signal a bearish reversal again.

Prices are above the short-term day period EMA at $619.56, indicating short-term bullishness followed by the 34-day period EMA at $588.45. Therefore, look for Comex gold futures to test the resistance levels and subsequently correct lower.

Supports are at $625, $612 and $597. Resistances are at $643, $650 and $665.

(The author is in the advisory panel of Multi Commodity Exchange of India Ltd(MCX). The views expressed in this column are his own and not that 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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