Gold to test resistance, slide

Comex gold futures ended higher on Friday, as inflation worries amid a crude oil rally and a downgrade of Ireland's sovereign debt powered bullion to its fifth consecutive weekly gain.

However, gold remained far below its all-time inflation-adjusted high, estimated at almost $2,500 an ounce set in 1980, an era of Cold War tension, oil shocks and hyperinflation.

Gold rose to a record in New York on speculation that the sovereign-debt crisis in Europe will worsen, boosting the appeal of the precious metal as an alternative currency.

Silver touched a 31-year high. Gold also rallied on demand from investors seeking a hedge against inflation. A third straight daily gain in U.S. crude oil stoked inflation worries, as improving consumer confidence and industrial production boosted the outlook for oil demand.

Comex gold futures rose higher perfectly in line with our expectations. As mentioned in the previous update, we anticipated the rally to continue higher towards $1,495-1,500 levels. 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.

However, extremely overbought conditions warn of a corrective decline anytime soon.

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 $1,345 or even lower to $1,250.

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 $1,495 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 extremely overbought zone now indicating that a downward correction looks likely.

The averages in MACD are still 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 $1,476, $1,453 and $1,410.

Resistances are at $1,495, $1,520 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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