Gold Broke its Five-Year Support at U.S. $1180 per Ounce, What’s Next?

Witawat (Ed) Wijaranakula, Ph.D.
Wed Mar 11, 2015

Gold futures for delivery in April 15 [GCJ5] extended their losses and dropped 1.18% on Wednesday to an intraday low of U.S. $1146.6 per ounce and closed at U.S. $1153.7 per ounce on the Chicago Mercantile Exchange (CME). Gold prices have declined precipitately since the beginning of March and made a 2.45% plunge on Friday as the U.S. dollar index (DXY) broke out a major technical head resistance of 96.2, or 50% Fibonacci retracement.

The DXY gained more strength after the Bureau of Labor Statistics (BLS), the U.S. Labor Department, said the U.S. economy added 295,000 jobs and the unemployment rate ticked down to 5.5% in February, exceeding economists’ expectations of a 240,000 jobs gain and an unemployment rate of 5.6%.

Bullish DXY bets are also coming from currency traders who are anticipating that the euro-dollar exchange rate heads to parity as the markets are in doubt that the latest ECB QE bond purchase program will prompt any meaningful economic recovery or counter the threat of deflation as the ECB hopes.

Concerns about China’s gold demand and retail sales have put the price of gold under downward pressure since mid-January of this year. According to Ian Walker, an analyst at The Bullion Desk, China's gold demand is on hold as buyers are awaiting cheaper prices, sub-$1,150 levels, before stepping back in. China’s National Bureau of Statistics said yesterday that China’s retail sales grew 10.7% from the year earlier in the January-February period, missing expectations for an 11.7% increase.

The decision by India's government to maintain a 10% tax on gold imports has also weighed on gold prices earlier this month. The traders have hoped that a reduction or elimination of the import duty would spur gold demand from India. India’s gold demand was about 729 tonnes in 2014, of which over 90% came from demand for gold jewelry, according to data from the World Gold Council.

As of March 3, there are 176,986 short positions for gold futures for delivery in April 15 [GCJ5], by swap dealers and managed money, compared to about 190,436 long positions, according to the Commitment of Traders (COT) data released by the Commodity Futures Trading Commission (CFTC) each Friday. The spread positions, the combination of both a long and a short position put on at the same time, stands at 162,336 contracts. 

Hedge funds seem to have cut some bullish bets as the long positions have dropped about 3,462 contracts from last week, where gold contracts are traded in units of 100 troy ounces.

From a technical viewpoint, the gold price could fall back to retest the base of the bearish ascending wedge at U.S. $1142 per ounce. The average decline of a confirmed bearish ascending wedge pattern is about 20% after the price breaks the lower trend line, meaning the projection price would be about U.S. $980 per ounce. 

If the gold price continues its pullback, there are supports at U.S. $1100 per ounce, or 15-year lower trend line support, and U.S. $1088 per ounce, the 50% Fibonacci retracement level. 

Here is what Goldman Sachs has to say about gold prices. The investment banker cut its gold price forecasts to U.S. $1,089 per ounce for 2016 and U.S. $1,050 per ounce for 2017, citing low inflation and higher interest rates in the U.S. as the key considerations behind the downward revisions.

Jeffrey Gundlach, CEO of DoubleLine Capital, a fixed income investment management firm with over U.S. $60 billion in assets, said yesterday that investors should stay long the U.S. dollar, while he thinks that gold prices could reach U.S. $1,400 per ounce by the year's end.

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