Gold to test resistance, slide

Comex gold futures ended lower on Friday, as weak US consumer sentiment data offset earlier strength following positive economic data from China. Gold hit the highest price since mid-December on Thursday on speculation that weak US manufacturing data and reports that Japan's central bank was set to deploy more accommodative monetary policy would lift demand for the metal. Physical demand has been quite strong in China ahead of the New Year celebrations and coin sales in US at an all-time high. Though short-term volatility continues in gold, the longer term, expectations that the US Federal Reserve would continue its monetary stimulus and concerns about US fiscal conditions will keep gold attractive as a hedge against inflation and uncertainty.

Comex gold futures moved in line with expectations. As mentioned in the earlier week, we expected prices to bounce back higher towards $1,690-95 levels. Price structures do not favour any major rise from current levels. We feel prices could gradually edge lower from here, though there is a minor chance of a test of $1,700-10 before the decline resumes. Crucial support is still at $1,625 and failure to hold support here could further take it lower towards $1,565-75 levels. Our favoured view expects prices to find a possible intermediate bottom near $1,550-65 range in the coming months. In the bigger picture prices are still in a broad consolidation after reaching all-time highs at $1,920. There is very good chance of prices testing $2,200-2,300 in 2013 while $1,520-25 remains undisturbed on the downside. Prices could now find resistance in the $1,695-1,710 range and then decline lower towards $1,640-45 levels initially or even lower. Only a close above $1,727 could cause doubts on our bearish view.

The wave counts are gradually hinting that a new impulse is in the offing. A possible corrective wave “C” has possibly ended at $1,523. As mentioned earlier update a corrective move in the form of wave A-B-C could have ended at $1,523. A new impulse has begun with a potential to test $2,025-30 levels in the form of a fifth wave move. A perfect confirmation of the same will be seen on a close above $1,785. However, a move below $1,690 has increased the possibility that the broad corrective consolidation in form of an “A-B-C-D-E” is in progress now. RSI is in the neutral zone now indicating that it is neither overbought nor oversold. The averages in MACD are still below the zero line of the indicator hinting at bearishness.

Therefore, look for gold futures to test resistances and then decline again.

Supports are at $1,675, $1,645 and $1,625 and Resistances are at $1,695, $1,710 and $1,730.

(The author is the Director of Commtrendz Research and also 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.t@gmail.com.)

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