The Hindu Business Line : Spot gold may head higher

SPOT gold prices climbed higher after the release of the US trade balance figures, which came in way above market expectations. The US trade deficit widened to a record $60.3 billion in November, which was far beyond expectations for it to narrow to $54 billion. October's deficit was revised to a wider $56 billion.

As always a weaker US currency tends to enhance demand for dollar-priced assets such as precious metals, by making them cheaper for overseas investors. Dollar would certainly stand to gain as the yield advantage goes in its favour.

However, the deficits are the main worrying factor. 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 still 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. Current fall in prices could be the ideal opportunity.

Spot gold moved in line with our expectations. Prices tested the support level at $417 and then bounced higher from there, which also happens to be the 200-day EMA level. Near-term support is at $423 followed by psychological support at $420.

Ideally, $422-423 should now provide good support and as long as this level holds, we can expect spot gold prices to test the falling channel resistance point at $435 in the coming week, as seen in the chart above. Important resistance is at $430-32 levels. Resumption of the bullish trend can, however, be confirmed only after a daily close above $440.

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 oversold zone now indicating a pullback to take place. 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 $426 and the medium term 25-day EMA is at $432.42. Therefore, look for prices to head higher again with intermediate corrections and pullbacks. Supports are at $425, 423 and 420. Resistances at $ 428.50, 433 & 435 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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