The Hindu Business Line : Spot gold may vault higher

SPOT gold prices are higher after news that South Korea's central bank planned to diversify its dollar reserves, which are the world's fourth largest, into a greater variety of currencies.

Spot prices hit their highest in 2005 as the dollar dropped sharply against its rivals, raising the allure of precious metals for overseas investors.

Markets also took support from news that the US lawmakers have objected to proposed sales or revaluation of gold stockpiled by the International Monetary Fund to finance debt relief for the world's poor nations.

Markets digested the testimony from Mr Alan Greenspan, which did not have any impact on the dollar. Though the undertone for gold remains strong and the dollar is expected to provide further direction, one factor that could hold gold back is the possibility of European central bank gold sales.

Spot gold prices rallied higher as per our expectations. Support should now be seen at $428-30 levels followed by stronger support at $425. As long as $424 holds the downside, we can expect spot gold prices to test $438-442 in the coming weeks.

With the indicators displaying overbought conditions, corrective moves can be expected intermittently and one should use the corrective moves as an opportunity to position longs again.

We would like to stick with our previous wave counts and only a move below $405 will force us to rework it.

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. Recent fall to $410.50 is possibly the corrective sub-wave of the fifth wave impulse we are currently in.

RSI is in the overbought zone now indicating a downward correction to take place. The averages in MACD have gone above the zero line of the indicator suggesting a bullish reversal. Only a crossover of the averages below the zero line in the indicator will signal bearishness again.

Prices are above the short-term 9-day EMA at $428.23 and the medium term 25-day EMA is at $425.27. Therefore, look for prices to rise higher towards the resistance levels accompanied by corrective pullbacks.

Supports are at $430.25, 428 and 425. Resistances at $435, 438 & 442 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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