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Need for safe haven increases demand for gold

Since the International Monetary Fund (IMF) lowered its estimation for global growth for 2015, the equity markets have seen a sizeable correction. Last week, before the correction in stock indices was reversed, over $3.2 trillion was momentarily wiped out from the value of the global stock market. In addition to this, various worries ranging from the spread of the Ebola virus to the Federal Reserve (Fed) tightening its monetary policy, added to the general feel of the investment world as we’ve known it over the last four to five years, coming, if not to and end, at least close to it. This translated into strength in Gold which is often viewed as a safe haven when global threats arise or when the Fed expands its balance sheet. It is clear from the charts that when things got jittery, money flowed out of the other markets, but not from gold. Instead, gold gained after it touched a long term support level. According to the Financial Times, flows into gold investment funds hit an eight week high in the week to October 15th. At the same time the comments from the St. Louis Fed president Mr. Bullard have left the door open for further expansion of the Fed’s balance sheet. Based on all of the above, it is safe to assume that gold prices will be either sustained above the latest weekly low (support level at 1183) or trend higher over the coming months.

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Gold weekly

Over the last two and a half weeks gold has been moving higher from an important support level (blue horizontal line). While the most important weekly resistance levels (red horizontal lines) are far away from the current market price, we should pay attention to the Fibonacci cluster levels on the above chart (black horizontal lines). Based on several major highs in the recent sideways move in 2013 and 2014, as well as the latest market low, it is possible to draw several Fibonacci retracement levels. Because there is no single right way of choosing the low/high points for the analysis, different people draw the Fibonacci levels from different price points. Fibonacci cluster analysis provides us the areas important to the majority of analysts by eliminating all the other levels and focusing on those that cluster together. This analysis provides us with the following areas of importance in Gold. Support (area below current price) 1215 – 1220 and Resistance (area above price): 1260 – 1268. The third area of importance for Fibonacci analysts is where the price currently fluctuates. This area coincided with the weekly low from June this year. Price action below this weekly low is likely to be range bound and the range best visible (and tradeable) in the smaller time frames (4h and 1h). I base this view on what happened the last time gold was moving up from the same support level and prices reached the previous weekly pivot low (in January this year). Then, Gold moved sideways for three weeks before breaking above the resistance area created by the mentioned weekly pivot low.

Gold 4h

In the above chart we have the same levels in a 4h chart. Price has been moving fairly steadily without strong extensions outside the Bollinger Bands, but some weariness in momentum is visible as the latest directional move hasn’t been strong enough to take gold to the upper end of the channel. This indicates that even though buyers have been able to work their way through the Fibonacci cluster at the weekly low, they are confronted with further supply at these levels.

If price breaks lower from here, potential supporting areas are the 4h Bollinger Bands that coincide with the daily low from Friday 17th and the penetrated resistance (see above chart) which has already proven itself as an area where buyers are willing to step in. It is worth noting that this level (a supporting Fibonacci cluster at 1215 to 1220) is roughly the area of former resistance from September this year and should the price move back there this would be a potential support and worth keeping an eye on.

Gold 1h

Price is currently hovering at the lower 1h Bollinger bands while it moves sideways just above one of the Fibonacci cluster levels drawn earlier, but seems to be slipping lower. If gold can’t close above the descending red trend line but keeps on drifting lower, I would look at the 4h (240 min.) Bollinger Bands as potential support or first target for short trades. If momentum analysis (e.g. in 15 and 5 min. charts) confirms that this area of potential support is likely to hold, then long entries could be considered at or around the level.
Conclusion: Keeping in mind that we are at price levels where psychology has changed substantially in June (the market turned from bearish to bullish right at current levels). This might mean that immediate upside is limited and that the market needs to dip lower to gather strength for another attempt to break through the above resistance. This is not very clearly visible in price action yet, but as I pointed out earlier the latest move higher in the 4h chart isn’t as strong as those before it. Therefore, it makes sense to prepare for the possibility of gold breaking lower and be ready to take long trades at potential support levels. However, if current minor support at Bollinger Bands and close to the level of rising trend line holds, it would be advisable for traders to act accordingly and follow the direction of the rising trendline in their trading.

Wednesday, 22 Oct, 2014 / 10:16

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