Gold traders still undecided about direction
Fawad Razaqzada October 6, 2015 5:41 PM
<p>Friday saw a big reversal in the price of gold following the publication of the US jobs report for the month of September. It is […]</p>
Friday saw a big reversal in the price of gold following the publication of the US jobs report for the month of September. It is fair to say that the jobs data surprised a few people and confused others, causing both the dollar and stock markets to initially drop while gold surged higher. The initial reaction to the poor US jobs report suggests that investor concerns about the weakening of global economic recovery intensified further, which is probably why the equity markets fell. However following the initial reaction, equity markets soon turned sharply higher as traders remembered the good old formula of “bad data equals good news” for stocks as the chances of the Fed keeping rates low for longer increased. The rebounding stock markets caused the positively-correlated USD/JP currency pair to rally off its lows while the EUR/USD, which tends to correlate negatively with stocks, fell. This is why the Dollar Index was able to come off its earlier lows quite sharply. Yet the buck-denominated gold was able to maintain most of its gains and the metal is still trading near Friday’s highs. The precious metal is therefore displaying some bullish characterises and may be able to extend its gains further if the dollar and to a lesser degree stocks retreat from their current levels this week.
However there are a few missing pieces of jigsaw though. These include the still-bearish market sentiment, the lack of global inflation and lacklustre physical demand. For these reasons I remain sceptical about whether this latest bounce will transform into a sustained rally. Indeed, should the metal refuse to break higher soon, we could see a sharp unwinding of those bullish positions that were opened on Friday. It could be that the level of speculative interest in gold is still not high enough to cause the metal to push decisively higher. Evidence of stronger physical demand combined with better market and economic conditions are probably needed before sentiment turns decisively bullish.
That being said, more short-term gains could be on the way if the metal manages to break above the bearish trend line that has been in place since the start of the year, around $1140/2. A decisive break here could lead to a rally this week towards (some of) the following levels next:
- $1165/70: previous resistance and 38.2% Fibonacci retracement of XA price swing
- $1178/80: 200-day moving average
- $1190/92: point D of an ABCD pattern, 127.2% Fibonacci extension of BC and 50% retracement of XA price swings
- $1215/20: extended point D (1.618) of an ABCD pattern, 161.8% Fibonacci extension of BC and 61.8% Fibonacci retracement of XA price swing; in other words, a Bearish Gartley entry point
However, if gold fails to break decisively above its bearish trend then it may fall back all the way to its 50-day moving average around $1120. Indeed, it could even break the short-term bullish trend line, which would be a very bearish outcome for the metal.
GAIN Capital UK Limited (trading as “City Index”) is an execution-only service provider. This material, whether or not it states any opinions, is for general information purposes only and it does not take into account your personal circumstances or objectives. This material has been prepared using the thoughts and opinions of the author and these may change. However, City Index does not plan to provide further updates to any material once published and it is not under any obligation to keep this material up to date. This material is short term in nature and may only relate to facts and circumstances existing at a specific time or day. Nothing in this material is (or should be considered to be) financial, investment, legal, tax or other advice and no reliance should be placed on it.
No opinion given in this material constitutes a recommendation by City Index or the author that any particular investment, security, transaction or investment strategy is suitable for any specific person. The material has not been prepared in accordance with legal requirements designed to promote the independence of investment research. Although City Index is not specifically prevented from dealing before providing this material, City Index does not seek to take advantage of the material prior to its dissemination. This material is not intended for distribution to, or use by, any person in any country or jurisdiction where such distribution or use would be contrary to local law or regulation.