GOLD SUMMARY: NEUTRAL
Moving Average: Neutral
Technical Indicators: Neutral
Technical Review by IRONFOREX
Gold fell sharply yesterday, breaking back below the psychological barrier of 1200 (R2), and finding support at around 1185 (S1). The break below the key barrier of 1200 (R2) turned the picture negative in my view. I would expect the metal to challenge the 1180 (S2) hurdle soon, but I would be careful of a possible upside corrective wave before the bears prevail again. The reason is because the RSI bottomed within its oversold territory and move above 30 soon. On the daily chart, gold has been trading in a non-trending structure since the last days of March. Therefore, although I see a negative near-term picture, I would hold my neutral stance as far as the overall picture is concerned.
• Support: 1185 (S1), 1180 (S2), 1170 (S3).
• Resistance: 1195 (R1), 1200 (R2), 1209 (R3).
- The commodity is likekly to continue trading sideways but keep an eye on Greece and the Eurozone developments as it could be the only trigger that could help the commodity go higher.
- When trading sideway charts price it is important to stablish levels of support and resistance as entry and exit point.
- Be aware that technical indicators will probably give a great amount of false signal at this stage.
- With the lack of trend and strong fundamentals to guide the commodity, trading sideway with a well stablish plan will be the way to go.
Factors Influencing Prices
The are a number of factors that can affect gold prices, posivitily or negativitily. There is not rule when or how any of this factor can influence the commodity. Sometimes excess supply will undermine prices and in another economic instance excess or lack of supply will be a welcomed by investors.
Demand and Supply
- The price of gold is on the rise continually due to its high demand and finite supply.
- Gold prices will increase when demand for gold is higher than the supply in the market.
- Demand for gold comes from three sectors:
- Jewellery sector – The jewellery sector consumes 68% of the overall gold supply, especially in countries in the Middle East and Asia. Gold demand rises during seasonal gift seasons such as Chinese New Year and Diwali in India.
- Manufacturing and medical industry – This sector takes 14% of overall demand, with demand gradually increasing over the past century with advances in technology and expansion of use. Gold is now used in nanotechnology, electrical devices and chemical processes.
- Investment – The investment sector has a higher demand for gold during ‘Credit Crisis’ periods when governments use reserve funds to buy gold to reduce the risk in holding US bonds, especially in countries such as China and India, which are experiencing rapid economic growth.
- Demand from Thailand. Prices in Thailand will increase when the Baht depreciates against the US dollar. Thailand cannot produce gold, so must import it from overseas. The gold market in general is traded in US dollars, so the Baht-US dollar exchange rate has a strong influence over prices in Thailand.
- Supply comes from mining and sales of existing gold in the financial system. Supply is affected by four main factors:
- Mine Production – Mines today produce 60% of all the gold in the market each year. South Africa is the world’s top gold exporter, with 14% of overall gold production worldwide. It is followed by the US, Australia, Latin America, China, Russia and Peru
- Recycled gold – Supply of recycled gold also plays a key role in the price of gold. Supply of recycled gold usually increases when the world economy is sluggish or when gold prices rise.
- Monetary sector sales – Central banks and more than 110 international organizations such as the International Monetary Fund hold gold in reserve funds. The main reserves are in the central banks of countries in Europe and North America, which sell gold to the market under the Central Bank Gold Agreement (GBGA) – central banks cannot sell more than 500 tons a year.
- Net Producer Hedging – Gold mines can make future contracts to manage risks from price fluctuations.
- When the USD depreciates, central banks of countries which have US dollar reserves spread their risk by investing in other assets such as gold, and investors around the world sell the currency and buy gold for security. This causes increase in demand and consequently, a rise in gold prices. On the other hand, when the US dollar strengthens, it causes a fall in demand.
- Gold prices will increase when U.S inflation rates are higher, as gold is an asset which rises with inflation. US inflation can generally be
predicted by looking at trends for fuel and food prices.
- Gold prices often increase during times of international political tension or when the world monetary system becomes less
stable. During these periods, assets are usually sold and gold is bought, as asset prices may drop during times of instability or crisis.