By FXEmpire.com
Gold has traded in a range between $1,612/oz and $1,697/oz since mid-March and the sideways oscillations narrowed as March moved into April. This horizontal trading pattern, which is below the January February highs, may well be a continuation pattern and that might mean prices end up breaking lower, below the $1,612/oz level. Such a development would also see the long term uptrend line breached – a line that can be traced back to the October 2008 lows around $682/oz. If the uptrend line is broken then we would expect a move down towards the spike lows between $1,532/oz and $1,522/oz seen in September and December last year.
Given the rise in uncertainty in global financial markets and current political turmoil it seems somewhat odd that investors are just now buying safe-havens. The debt situation in Europe is escalating again, this time with the focus on Spain, and the EU economy is shrinking further with manufacturing PMI falling to 45.9. Gold and the dollar have, however, both been on a back footing for most of April. Greater likelihood of quantitative easing (QE) and low interest rates are no doubt weighing on the dollar, but these factors should be bullish for Gold.
So far, however, the market has failed to react that way. It may be that strong equity markets are attracting money out of safe-havens and into more risky assets. The Dow has been climbing steadily since last September with the index reaching levels not seen since December 2007.
With the Fed keeping QE on the table and with the market getting used to ‘big government’ preventing crises from unfolding, it may be that investors are tired of being out of the equity markets when corporate earnings are generally doing well.
Judging by weaker premiums in India and China, it appears that physical demand is weak. In India, the market is still struggling in the aftermath of the government’s introduction of excise duties on unbranded jewellery (which was voided earlier this week) and their doubling of tariffs on imports to four percent. In protest, local jewellery retailers went on strike for 21 days and that hit Gold sales. The Bombay Bullion Association estimates Gold imports fell to 15-20 tonnes in March, from 75 tonnes a year earlier and were 30-35 tonnes in April, down from 90 tonnes in April 2011
Given the deterioration in the EU economy and the US labor market, plus an escalation in the EU debt crisis and political uncertainty, we are seeing a risk-off correction across markets and that is pushing Gold prices lower. However, the secondary reaction to such a sell-off may prove bullish for Gold because as money comes out of risky assets it may well look for a safe-haven while the correction is underway. In addition, another sell-off would increase the likelihood of the Fed doing, or hinting at, more QE and in turn that would likely weigh on the dollar and be bullish for Gold. Perhaps Ben Bernanke will give us some clue in his speech on Thursday.
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Originally posted here
