Gold has closed below key support. Further declines are likely.
Bullion.Directory precious metals analysis 3 November, 2014
By Christopher Lemieux
Senior FX and Commodities Analyst at FX Analytics
Last Friday, the market witnessed gold capitulation on the back of the Bank of Japan (BoJ) announcement to ramp up their non-effective quantitative easing measures. As one central bank, supposedly, exits QE for good, another takes its place; and, risk is fully on.
Gold is trading sideways to open the week after the onslaught on gold prices last week due the QE pair trade. On the announcement by the BoJ to increase the amount of JGB purchases, from ¥8 to ¥12 trillion per month, and efforts to expand the monetary base, the yen sold-off to great proportions. This reaction caused a squeeze in the US dollar. In response to the dollar’s reaction, traders liquidated gold positions.The yen reached a seven-year low against the dollar, and the dollar index hit a four-year high – marking gold’s new four-year low.
Price action is in stark territory because gold has closed below the 2013-low, as well as lingering at important support levels on the monthly chart. On October 3, I posted that given the institutional bearishness, the 2013-low would be sought out on a longer-term basis (technically). Here, the support level of $1,179 was tested several times and prices rebounded. Unfortunately, the close below this price support could signal further downside in gold prices. (see original post).
The longer-term ascending trend line on the monthly chart is being tested. Currently, gold has been finding support near $1,160 per toz., but a close below will be a quick confidence killer to any substantial rebound.
A break below, gold will search out $1,133, and, eventually, $1,108 per toz. Near-term resistance levels will be found at former support of $1,179, with additional resistance at $1,200 and $1,232 per toz.
The global central banking policies will keep gold subdued until the broader global economic weakening strengthens. Central bank rhetoric has misdirected market participants from unflattering headlines, but it is not certain when this will stop.
Institutional players love to hate gold because it fits into their thesis. Since the Fed has issued the end of QE 3, there has been an influx of analysts doubting whether or not the multi-QE programs worked. Former Fed Chair Alan Greenspan flat out said the positives were nil. Abeconomics in Japan has had a quick falling out after the growth expansion in Japan stopped after a mere two quarters. The BoJ now doubled-down.
QE cannot structurally fix a weak economy, but, in the mean time, gold could take its licks.
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