Gold has started 2015 with a bang, now up for a third consecutive day. It is defying the dollar strength which has meanwhile risen to its highest level since 2006 against a basket of foreign currencies. The yellow precious metal has clearly found support from increased risk aversion, owing in part to the political turmoil in Greece and growing concerns about the health of the European economy. There have also been suggestions of stronger demand from China ahead of the Lunar New Year celebrations on February 19: some 99.1 tons of the metal on a net basis were imported from Hong Kong in November. Not only was this the highest volume since February but was also the fourth consecutive monthly increase. However, the level of physical demand elsewhere remains weak. In the US, for example, data from the US Mint suggests that 39% less gold coins were sold last year compared with 2013. At 524.5 thousand ounces, this was also the lowest volume since 2007. Unless demand for gold rises rapidly, the price of the metal is likely to remain under pressure. Investors are likely to continue favouring equities over gold amid the record low interest rates across the major economies. What’s more, the situation in Greece has not caused the market to push the panic button yet, even though equities have come under a little pressure of late. Therefore, demand for the safe haven asset may fall back quickly, leading to a sharp drop in its price. Gold has also reached a key technical resistance area, so a pullback could be on the cards soon.
Technical outlook
It is no secret that gold traders love Fibonacci levels, in particular the 61.8% retracement. Sometimes exact tops or bottoms are formed at the 61.8% Fibonacci retracement level while other times gold tends to pierce through this level before turning, which is still okay because technical analysis is never meant to be exact science. Why gold traders are paying particularly close attention to the 61.8% retracement and sometimes the 161.8 percent extension level is a question I cannot answer. I can only assume it is so because Fibonacci levels can be considered to be a self-fulfilling prophecy. After all, these are, in my view anyway, the most important of the Fibonacci levels and therefore Fib-lovers base more of their trading decisions around them compared to the other levels. Anyway, the important point is that these levels are significant when trading gold (and indeed other assets including FX and stocks) and tend to work on all time frames. For example, as the weekly chart shows in figure 2, gold has stabilised in recent times after the sellers were unable to hold their ground below the long-term 61.8% Fibonacci retracement at just shy of $1155. That was despite the fact that the long-term horizontal support at $1180 had already broken down. The lack of follow-through in selling there suggests gold’s long-term bearish trend may have ended. However, so far the downward-sloping trendline has remained intact, so the trend is still bearish. Only a decisive break above resistance and prior high around $1240 would signal a change in direction.
Refocusing on the importance of the 61.8% Fibonacci level again, you can see on the daily chart in figure 1 that the recent rally has initiated from this particular retracement level at $1172. The rally therefore could well have been driven by technical rather than fundamental reasons. If this is true, it should come to a halt around these levels soon, for not only is gold near that long-term bearish trend line, which comes in at $1218, it is also testing the 61.8% Fibonacci level of its most recent sell-off at $1211. If the sellers do re-emerge around here, gold could be pushed back down below $1200 again and maybe even below the prior low at $1167, too, which would be a particularly bearish development. On the other hand, a break above the aforementioned bearish trend line could lead to a rally towards $1240 and potentially beyond. In other words, gold is currently at a key technical juncture and we could well see a sharp move in either direction soon, particularly as this is also an NFP week.
