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Gold Outlook Bullish on Weaker Dollar, Continued Geopolitical Concerns

By , Currency Analyst
22 April 2011 21:36 GMT
Gold_Outlook_Bullish_on_Weaker_Dollar_Continued_Geopolitical_Concerns_body_Picture_1.png, Gold Outlook Bullish on Weaker Dollar, Continued Geopolitical Concerns

Gold Outlook Bullish on Weaker Dollar, Continued Geopolitical Concerns

Fundamental Forecast for Gold: Bullish

After weeks of range trading and congestion, Gold has continued its march higher and higher, setting all-time highs everyday this week. Gold gained every day this week, finally settling at $1507.04 on Friday, slightly off of its high from the day and the week, at $1512.68, marking a 1.4 percent gain overall for the week. Still, Friday’s close represents the highest such level bullion has closed at all-time.While the geopolitical tensions in the Middle East and North Africa region seemingly looming in the background, the markets turned their collective eye this week towards inflationary pressures, and a weaker U.S. Dollar following the S&P’s announcement on Monday that it would put the United States AAA rating on ‘negative’ watch. Still, Friday’s close represents the highest such level bullion has closed at all-time. The week ahead could provide more of the same as a few key events point towards further inflation concerns as well as continued Greenback weakness.

Wednesday is shaping up to be the most important day of the week, on a fundamental basis, for commodities, given the two consumer price index releases in the Asian and European sessions, followed by the historically market moving FOMC interest rate decision midway through the North American session. Price pressures continue to rise in Europe’s largest economy, and with European Central Bank President Jean-Claude Trichet noting that the rate hike on April 7 might not necessarily be the first in a series of rate hikes, it is likely that further evidence of price pressures in Germany could send investors fleeing towards bullion and other precious metals as a hedge against inflation. The most important event of the week, however, comes later in the North American session, when the FOMC is expected to maintain the key interest rate at 0.25 percent, as it continues its $600 billion stimulus plan, dubbed ‘quantitative easing 2.’ While a U.S. Dollar rally on the heels of hawkish commentary by Federal Reserve Chairman Ben Bernanke would certainly stunt gold’s parabolic climb, the markets view a shift in FOMC policy unlikely to occur at this meeting, with the Overnight Index Swaps showing a 0.0 percent chance of a 25-bps rate hike at the meeting.

On a technical basis, bullion continues to hold above its 20-SMA, and the 50-SMA has widened the spread over the 200-SMA, a historically bullish sign. The precious metal remains well-above its rising trend line off of the November and December highs; said trend line now acts as a level of support, with $1514.00 as the main resistance headed into the coming week. The RSI on the daily chart remains overbought, and given the furious pace at which gold has gained since mid-January, a retrace could occur on a purely technical basis, as traders take profits off of the table. Still, fundamentals trump technicals, and if prices remains higher, I would conjecture that the prices are normalizing at the current rate, and thus can be expected to move higher as a significant level of support is forming following the brief correction that occurred last week. In reality, futures continue to trend higher, suggesting further gains are indeed ahead. The Slow Stochastic oscillator remains trending higher, though the %K is at parity with the %D, at 95; this suggests the rally could be stalling. To this conclusion, that prices could moderate before climbing higher, the MACD Histogram is tailing off of its bullish divergence; the differential is decreasing, at 36, having moved down from 40 on Wednesday. -CV

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22 April 2011 21:36 GMT