Gold & Silver; Watch the Dollar Index & Equities
Bullion Round Up
After last month rally, the dollar index started the week with a sell off and currently retesting support at the pivot level of 83.00. A break below that level could increase selling pressure and the index may retrace lower to 82.50 and 82.25 areas. However, the uptrend is still intact and dip buyers are waiting to jump in to boost a higher dollar index after an encouraging economic data. A better than expected US consumer sentiment and Chicago PMI gave the dollar enough boost and sent gold lower. US equities are showing a resilient strength with minor pullback despite talks of tapering in the coming months. Bad economic data from the US boost equity price as the Fed will continue the quantitative easing programme while good data could see minor corrections but the general trend is still up.
Gold prices are affected by the strong dollar index, strong rally in global equities, a strong decline in safe haven demand and falling inflation numbers. After the major sell off in April, prices have rebounded due to strong physical buying from Asian investors. This demand has dampened significantly as prices rose higher. Investors are more cautious and waiting for another round of low price to buy in again. ETFs outflow has slowed down considerably, leaving only the core investors who are holding for the long term (strong hands). An uptake on ETFs will encourage confidence in the market again. Recent CFTC report suggests that the large short positions by Hedge Funds are seeing some reduction. Instead, there were suggestions that selling could run out of steam and short covering in the coming weeks is possible. Saxo bank Mr Ole Hansen noted that “A stable price of gold during the week in question resulted in hedge funds raising their net-long position by 35 % to 48,096 contracts, the biggest gain in more than two months. The rise was triggered by new buying but also by a reduction in bearish bets which during the past couple of weeks had reached a record high.”
The risk to the downside remains but short term trading favour a higher gold price. If the situation permits, a weaker dollar index, correction in equity, increase uptake on ETFs product and with a decent physical demand may help gold retest resistance at $ 1424 area. However, our long term projection is to see this small rebound to falter and gold to retest previous low at $ 1321 or even lower.
After a worse than expected US Manufacturing ISM data, dollar index fell through support level of 83.00 and retested previous resistance at 82.50. Buyers flock to gold as equities failed to rebound on bad economic data. The usually chirpy equities failed to act higher despite the fact that manufacturing ISM data shows contraction - which usually indicate that the Fed will not taper the QE programme. Given that both DYX and global equities on the back foot, gold rose higher retaking $ 1400.00 and reached resistance at $ 1416.50
Looking forward, a short term rally in a bear market is to be expected. Another bout of short selling opportunities is in the making and we would not be surprise that resistance at $ 1487 will be strong.
|Resistance: $ 1423, $1437, $ 1438 Support: $ 1384, $ 1373, $ 1325
Traders Notes: Longs are taking positions at $ 1398, $ 1400, $ 1406 and $ 1414 with a stop loss ranging from $ 1373, $ 1385 and $ 1390 area. Profit target sets at $ 1424, $ 1445 and $ 1460 area.
Shorts are taking positions at $ 1404.50 and $ 1420.00 with a stop loss at $ 1425 area. Profit target is sets at $ 1400 and $ 1395 area.
|Short Term (1 week)
|Medium Term (1-3 weeks)
|Long Term (1-3 months)
|Bullish - target $ 1425 at least
|Bullish - target $ 1460
|Bearish - target $ 1280
Silver received strong bids after the bad economic data but traders were cautious that the industrial metals are reacting positively on bad economic news. It should have gone the other way (meant to be sold) but prices have moved to $ 22.97. The only disappointment is that it did not manage to cross above last week high at $ 23.12 despite a weaker dollar. Technically, it has got rooms to move higher but it could continue to trade in this range of $ 22.00 and $ 23.50. Only a break above $ 23.35 will it encourage the bears to do more short covering.
|Resistance: $ 23.19, $ 23.35, $ 25.59 Support: $ 22.05, $ 19.66, $ 19.00
Traders Notes: Longs are taking positions at $ 22.40 area but with a wide stop loss at $ 21.75. Potential profit area comes in at $ 23.20 area and others are targeting higher numbers.
|Short Term (1 week)
|Medium Term (1-3 weeks)
|Long Term (1-6 months)
|Bullish - Break $ 23.19
|Bullish - Retest $ 24.50
|Bullish - a potential bull run?
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