Gold to test resistance, fall

Comex gold futures ended sharply higher on Friday, to a record high for a fourth straight day and silver surged on Friday, as a weaker dollar, the prospect of a US government shutdown and inflation worries lifted precious metals in a broad commodities rally. Gains in other commodities also lifted precious metals, as crude oil futures soared to their highest since 2008. Gold has been a major beneficiary since the Fed has kept short-term rates near zero since December 2008. The European Central Bank yesterday lifted interest rates for the first time in almost three years to quell inflation even as Portugal seeks a bailout, becoming the third euro-region country to need a rescue. China also this week increased rates to combat rising consumer prices.

Comex gold futures rose higher in line with our expectations. As mentioned in the previous update, we anticipated the rally to continue higher towards $1,465-75 levels. Further gains towards $1,495-1,500 levels look likely now. However, extremely overbought conditions warn of a corrective decline anytime soon. Initial resistance is at $1,495 and stronger resistance is at $1,525-30 being a long-term trend line resistance point as seen in the chart above. Subsequently, a gradual decline can be seen towards $1,405 levels or even lower in the coming months. Caution should be exercised on being aggressively long at present levels and ideally some profit-booking can also be done if one has been holding it for a while. Only an unexpected fall below $1,410 could result in a corrective decline targeting $1345 or even lower to $1250.

As mentioned earlier, a daily close above $1,395, will hint that a new impulse or an irregular wave “B” could be in the making. Our preference is now towards a beginning a fifth wave targeting $1495 or even higher towards $1,525-30 rather than that of an irregular wave “B” as prices crossed $1,385. We now see the recent high of $1,435 as the end of a third wave impulse only and a decline to $1,309 as an end of a minor corrective A-B-C decline. RSI is the overbought zone now indicating that a downward correction looks likely. The averages in MACD are above the zero line of the indicator indication bullishness to be intact.

Therefore, look for gold futures to test the resistances and then fall lower subsequently.

Supports are at $1,455, $1,423 and $1,410. Resistances are at $1,495, $1,510 and $1,530.

(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_thiagarajan@yahoo.com .)

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