Fundamental Forecast for Gold:Bullish
- Gold Breakout Above $1275 Aided by Short Retail Crowd
- Gold Marches on Towards 1306; 1322 is Bigger
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Gold prices surged this week with the precious metal advancing more than 4% to trade at $1319 at the New York close on Friday. The rally marks the second consecutive weekly advance, pushing prices to their highest levels in over three months as the greenback turned heavy. The USD has struggled since the start of the month with the Dow Jones FXCM USDOLLAR index falling near three-month lows as concerns over the strength of the recovery and the pace of the Fed taper come into question.
Heading into next week traders will remain focused on the US economic docket with housing starts, building permits, existing home sales and inflation data on tap. With the recent softness on the data front and the new Fed Chair Janet Yellen pledging to keep policy accommodative until such time where the recovery can be deemed as ‘sustainable’, weaker prints next week could continue to fuel speculation that the recovery is slowing, a factor that would likely pressure the Federal Reserve to scale back the pace or even pause QE tapering.
Interruptions to the Fed’s exit strategy are likely to remain supportive for gold prices/ bearish for the USD in the near-term. The main event next week will be the release of the minutes from the January policy meeting, Bernanke’s last as Fed Chairman. Should the minutes show an increased discussion as to the softness in both employment/inflation data, look for gold to remain supported with key technical barriers seen just higher.
From a technical standpoint, the broader medium-term outlook shifted to the topside with the break and close above the $1268/70 barrier we noted a few weeks back. With the secondary objective at $1319 having already been achieved, the focus with a breach now shifts to the 23.6% retracement of the decline off the 2012 high at $1325 with more significant resistance seen at $1336/38. Daily RSI has now signaled an overbought condition for the first time since August and its first directional break of magnitude above this threshold since August of 2012 where prices mounted a much more aggressive rally. Bottom line, the gold trade remains constructive above the $1268/70 threshold, with near-term support seen at $1291. With the USDOLLAR index now at a key support level, look for a pullback early next week to offer favorable long exposure. – MB