Thursday, October 22, 2009

Gold Consolidates while Setting Higher Lows

Gold continues to consolidate around the psychological $1500/oz level while setting lower highs and higher lows. This pattern tells us there is a wedge forming, which is why we installed a downtrend line. Gold’s sideways movement reflects investor indecisiveness in terms of whether to keep the risk rally rolling. Analysts and bankers are barking from both sides as doubt creeps back into the broader market. However, Q3 earnings are beating expectations and although econ data has been negatively mixed, it’s solid nonetheless. Meanwhile, the Fed’s Beige Book shows the central bank is not even close to tightening liquidity, meaning Dollar’s near-term downward trajectory is intact. However, the ECB is getting antsy and may opt to take some dovish action should the EUR/USD breakout to the topside again. On the other hand, actions speak louder than words, and overall central banks continue to gravitate towards a more hawkish monetary stance. This is good news for gold’s near to medium-term outlook since the precious metal is negatively correlated with the Dollar.

All eyes will be on the EUR/USD’s interaction with 1.50 and the Cable’s ability to separate itself further from 1.65. We recognize consolidation in the AUD/USD and technicals continue to favor the topside in all of these currency pairs. Therefore, gold’s present consolidation is not necessarily a bad thing since the process develops a new support base should investors decide to extend the precious metal’s rally towards $1100/oz. The EU will be releasing a wave of PMI numbers tomorrow to go along with Britain’s Prelim GDP and America’s Existing Home Sales data. Therefore, gold and the FX markets could experience heightened volatility as the week comes to a close.

Technically speaking, gold faces topside barriers in the form of our downtrend line along with 10/21, 10/20, and 10/14 highs. As for the downside, gold has our 1st and 2nd tier uptrend lines serving as technical cushions along with 10/21 and 10/16 lows. Additionally, the psychological $1500/oz level should continue to play a lead role as long as it’s in the picture.

Present Price: $1055.85/oz

Resistances: $1058.75/oz, $1061.40/oz, $1065.15/oz, $1068.06/oz, $1070.66/oz

Supports: $1055.46/oz, $1051.91/oz, $1048.62/oz, $1045.32/oz, $1042.96/oz

Psychological: $1050/oz, $1075/oz, $1100/oz

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