The US Federal Reserve ended the asset purchases as expected just two days ago and now Bank of Japan, against all expectations, has increased its stimulus program. This has caused Gold (priced in USD) to fall further. According to Bloomberg, the Bank of Japan is now targeting an 80 trillion yen ($726 billion) expansion in the monetary base. This move together with expected stimulus from the ECB supports the US dollar. Investors have been buying gold over recent years mainly as a hedge against the unprecedented expansion of the Fed’s balance sheet. Now that the Fed has wound down their Quantitative Easing program and is not signaling that it would be ready to initiate a new one, investors seem to be turning away from gold to other, better yielding assets classes.
The Fed’s hawkishness is causing dollar strength against the major currencies and gold is not an exception in this regard. Many people think of gold as a currency and because it is priced in USD, the dollar strength means weakness for gold. Gold is at the time of writing breaking the weekly level that supported the price since June 2013. Last week the price formed a weekly shooting star right below a resistance level and has moved substantially lower turning the technical picture bearish for gold. I was expecting the price to form a trading range below that weekly resistance and then move higher from there. This scenario was based on the collection of fear factors in the world (which would translate into support gold on safe haven basis) and the fact that the last time gold moved up from the same support it was at first range bound for a while under a similar weekly resistance level before eventually moving higher. However, as this scenario didn’t play out, we need to find the current resistance and support levels for gold. The weekly low (1156) from July from 2010 is a very potential candidate for a support. As for a resistance, it is likely that the former support at 1183 will now act as resistance.
Gold and DXY, 4h
Over the course of this year gold has reacted higher each time the US Dollar index (DXY) has reacted lower from a resistance, and vice versa. The Dollar index is a measure of the dollar value of USD against a basket of major currencies. The weights of these currencies in the index are as follows: EUR 57.6%, JPY 13.6%, GBP 11.9%, CAD 9.1%, SEK 4.2% and CHF 3.6%. DXY is now approaching a reaction high while Gold is well below the coinciding reaction low. Therefore it is possible that the timing of gold reaching the support DXY trading at the reaction high could coincide. Should this happen simultaneously there would be an increased likelihood that we could see a reaction higher from the 1156 support. But what might be the trend in the price of gold after that reaction? Now that the Bank of Japan is even more aggressive with their QE than anticipated and the ECB is expected go along the same route it seems likely that the DXY will keep on moving higher. This would mean further weakness for gold.
Apart from the penetrated weekly support (at 1183, now resistance) the next resistance levels are at 1195 and 1208. Should the price rally to these levels I would be looking to short the signs of momentum reversals (in lower timeframe charts) with a tight stop and reasonable leverage. The latest low and the weekly support at 1156 could work as targets for these trades. However, please remember that these are just guidelines for you on how to do your own analysis. You should never trade blindly on someone else’s ideas but rather see if the price action at suggested levels supports the idea given to you.
The weekly shooting star candle from last week and the breaking of major support suggests further weakness and rallies to resistances should provide shorting opportunities. The current central bank policies support the USD and therefore increase the likelihood of DXY moving into new highs and gold moving lower. A very sharp reversal with a weekly close above the 1183 level would mean a revaluation of the current analysis would be necessary.
Disclaimer: Nothing in this communication contains, or should be considered as containing, an investment advice or an investment recommendation or a solicitation for the purpose of purchase or sale of any financial instrument.
Chief Market Analyst