GOLD TODAY – Price rallies after Fed is split but keeps rates unchanged

Short Term: Medium Term: Long Term: Resistances: R1 1307.90 2015 high R2 1375 High so far R3 1388.70 March 2014 high Support: S1 1332 50 DMA S2 1323 20 DMA S3 1306 100 DMA S4 1300 Psychological level S5 1250 38.2% Fibo 2015 low to 2016 high Stochastics: Legend: WMA = Weekly moving average DMA = Daily moving average UTL = Uptrend line RSI = Relative strength index H&S = Head and shoulder pattern Technical Comment Analysis Weekly: Gold found support from the 20 WMA and is attempting to erode resistance from the DTL off the July high. The weekly RSI is not yet overbought and the stochastic fast line has completed a bullish crossover with the slow line. A strong price rise and a break above resistance would make further upside likely. Key resistance now lies at $1,355. Daily: Dip-buyers found value at the 100 DMA as well as the January low UTL. This technical support level has allowed gold to bounce higher and keep its positive momentum intact. The metal took out the 20 and 50 DMAs in yesterday’s surge. The stochastic lines have also turned bullish while the daily RSI is trending higher and is far from overbought although it is fast approaching resistance from the potential bull flag channel. A break above would assist the bulls but we would be wary of any false break. Macro drivers The Bank of Japan kept its benchmark interest rate at -0.1 percent but effectively pegged the 10-year yield on Japanese government bonds at zero to meet its inflation target of two percent. The yen initially weakened on the news, pushing gold to retest the lows at $1,308 before reversing higher. The metal managed broke higher after the US Federal Reserve kept rates unchanged. The dollar index tumbled to 95.48 from 96.32, down 0.8 percent for the day. Further weakness in the dollar has sent investors seeking safe havens. But the Fed laid the groundwork for an increase in the coming months – there is a high  probability of a rise at the December FOMC. Looking at the latest speculative funds positioning, declining open interest suggests that money flow in gold has been falling steadily. Since the peak of 652,971 contracts on July 5, money managers – primarily the longs – have reduced their exposure. Open interest was 572,002 contracts as of September 13 – longs liquidated 18,599 contracts while shorts added 3,848 contracts. The net long fund position (NLFP) stood at 285,413 contracts prior to the FOMC meeting. With the meeting having passed, net longs remain vulnerable to further liquidation given the overstretched position; gold runs the risk of net shorts rebuilding. ETF investors have been resilient in their positioning and, given recent developments, may well raise their exposure. This should support the gold price, which has seen mild pullbacks amid further consolidation. According to our estimates, ETF investors have bought about four tonnes of gold since September after buying 16 tonnes in August and 75 tonnes in July. Conclusion We remain friendly towards gold but are well aware of the risk if speculative funds reposition due to a potential increase in market volatility. The prospect of a US rate rise in December may cap the upside. Failure to clear resistance at $1,355 would leave gold’s technical structure looking rather toppish and vulnerable to further weakness. If that is the case, we feel that gold may have a difficult trading quarter ahead while its technical and fundamental aspects shift in favour of deeper retracement rather than a mild pullback. All trades or trading strategies mentioned in the report are hypothetical, for illustration only and do not constitute trading recommendations.

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