Gold prices surged 3.1% yesterday to an intra-day high of U.S. $1267.20 per ounce before pulling back and closed at U.S. $1262.60 per ounce. The Swiss National Bank (SNB) said that they would discontinue its three-year minimum exchange rate of 1.20 Swiss francs per euro, citing the Swiss franc is still high but no longer overvalued.
Hedge fund managers got caught by surprise and scrambled to sell euros and bought gold and U.S. Treasuries as “Safe-Haven” trades. The U.S. dollar index printed at 92.75, the highest reading since December 2005. The euro-dollar exchange rate nose-dived to a new multi-year low at 1.1569 dollars per euro.
In anticipation of the February 19 Chinese Lunar New Year, the peak of the gold-buying season in China, the price of gold has been on a rebound since it hit a four-year low in November 2014 at US $1130.40 per ounce. Since the New Year comes two weeks later this year, Chinese gold demand could be higher than last year. It is a Chinese tradition to give gold, as it is believed that gold brings good luck in the New Year.
According to the China Gold Association (CGA), Chinese wholesale gold demand in 2013 reached 2,200 tonnes, more than half of the global demand of about 3,756 tonnes, as reported by the World Gold Council. Based upon the amount of gold withdrawals from the Shanghai Gold Exchange (SGE), Chinese gold demand is expected to be about the same or slightly lower in 2014.
With rising gold prices and a slowdown in the Chinese economy, it could be difficult to speculate what the Chinese gold demand will look like after the seemingly robust demand running into the Lunar New Year.
From a technical viewpoint, gold prices have been moving in a bullish falling wedge chart pattern since the price hit an all-time high of U.S. $1923.70 per ounce in September 2011. A failed attempt of a falling wedge breakout in late 2012, after the European debt crisis, resulted in gold prices taking a nosedive.
An attempt by gold prices to break out this time could face several key technical resistances at US$ 1285.46 per ounce, or 15-year 38.2% Fibonacci retracement, US$ 1309 per ounce and US$ 1346 per ounce.
Keep in mind that the ratio between paper gold, known as CME gold futures traded on the Chicago Mercantile Exchange, and physical gold could be at least 50 or as high as 100. It means that there are contracts worth 50 ounces or 100 ounces for every one ounce of actual physical gold in the COMEX warehouses. So, expect a lot of volatility on the way up.