Gold! Where to from here? – Part 2
Posted on Friday, 1 November, 2013 by Graham Fox
Gold has not responded well to the continuous printing of money by the global Central Banks over the past two years which seems confusing when compared to the historical behaviour of the metal when inflationary pressures are supposedly building. The price of gold has actually fallen in price from US$1,896.50 on the 5th September, 2011 to the recent low of US$1,192 on the 11th October 2013. That is a US$704.50 price movement, a substantial fall.
Most economists would have expected that with the amount of money that has been pumped into the global financial markets, the liquidity would eventually cause inflation to emerge at some point in time and that this event would normally tend to strengthen to the price of gold.
We have seen previously that under such conditions, in a normal economic cycle, financial institutions would have resumed lending again given the funding liquidity available and the more relaxed credit conditions however, much of the liquidity generated by the Central Banks seems to have been utilised in repairing not only their own balance sheets but those of the corporate world.
With both companies and consumers remaining wary of the current economic conditions and content to wait on the sidelines until their economies to show some more consistent and hopefully sustained improvement, it would appear that global growth is going to take longer to evolve than what has been experienced historically.
Historical Gold Prices
The Gold price finished the September quarter at US$1,326.50, Currency A$/US$ 0.9309 and A$1,424.96. In September 2003 it was US$388, A$/US$ 0.6801 and A$570. The Gold price over the last 10 years is as follows:
Data Source: World Gold Council and the Reserve Bank of Australia.
Long Term View of the Gold Price
When we look at a technical view of the potential support and resistance levels of the Gold price, one source of guidance is the Fibonacci numbers, (Leonardo Pisano Bigollo c. 1170 – c. 1250). The key data points are:
If we observe the price movements over the last 5 years, date range: 2nd January 2008 to current, 22nd October 2013, then the following are the high and low points of US$ Gold.
Low: 24th October 2008 – US$692.50
High: 5th September 2011 – US$1,896.50
Difference in prices: US$1,024.00
Using the Fibonacci number sequence, the support levels for the move down, post the high, would be:
Initial Support (38.2%): US$1,436.50
Mid range Support (50%): US$1,294.50
Strong Support (61.8%): US$1,152.43
Recent Gold Price Movement
When we observe the more recent Gold price movement we can see that from the low point at the end of June 2013, the rally ran out of steam very quickly and then headed south once again.
Data Source: World Gold Council and the Reserve Bank of Australia.
Short Term – Key Price Points
Low: 28th June 2013 – US$1,192.00
High: 27th August 2013 – US$1,419.25
Difference in prices: US$227.25
The resistance level indicated for the Gold price is around the US$1,330 (61.8%) of the range from the recent low point. It is not that relevant in this analysis to postulate what are the short term support and resistance levels as they are best utilised as a trading strategy however, when we look at the Gold price movement, in terms of the longer term technical’s, then we see that the key support zone, recently tested at around the low point of US$1,192. This now becomes a significant level and will be the focus for any challenge lower.
Where To From Here?
Gold has been utilised as a safe haven for investment during the GFC however, the recent growth data indicates that the US economic recovery is underway. The improvement in the economy has been underpinning the upward price movement in the share markets as companies, recovering from the impact of both, the GFC and the European Sovereign Debt crisis, look for opportunities to expand their businesses and grow future earnings.
Against this backdrop, Investors are starting to reduce their safe haven assets, such as cash and Gold, opting to head back towards the riskier asset classes, such as shares.
The key support and resistance points for the Gold price indicated from this analysis are as follows:
Resistance: US$1,420 to US$1,460
Support: US$1,150 to US$1,190
The current trend for the Gold price is to test the support area and see if this level can hold. Against this trend is the pending buying of Gold for the Indian wedding season which normally fuels demand for the metal over the months leading up to and especially, November each year. The problem is this year investors are selling down their safe haven assets including their Gold holdings. This activity has been particularly evident in the holdings of Gold exchange traded funds (ETF’s) globally. The volume of Gold sold over the last 9 months has been significant with one major Gold ETF seeing a 35% reduction in holdings, equivalent to over 400 tonnes of Gold being liquidated. If this Gold ETF selling continues then, the Gold price may suffer accordingly.
As a guide, a genuine break of the support at US$1,150 Gold price level could potentially see a test of US$980 to US$1,020. This projection is based on the long term price movements and technical indicators.
Should inflation and global demand drive the Gold price higher, especially buying from the Central Banks then, a key level to watch is the resistance level around the US$1,450. A break above this level could see a run back towards the US$1,630 level.
Note: Technical analysis is not an exact science but simply an indication of what the Fibonacci number sequence highlights. The Fibonacci technique is used extensively by traders of both, currency and commodities. Historically, the number sequence has been proven to be a useful trading tool in assisting with buy/sell decisions. This analysis should not be regarded as a recommendation to buy or sell Gold. Please read the disclosure below.
Author: Graham Fox, Specialist Investment Adviser, FOX Wealth Management – Authorised representative of HNW Planning Pty Ltd., AFSL No. 225216. www.foxwealth.com.au
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