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Gold Falls on Steady US Growth, Rebound on the Horizon?

Gold Falls on Steady US Growth, Rebound on the Horizon?

Research, Research Team

Main Points:

Gold prices dropped last week after a five-week winning streak

• Gold prices may rebound from $1233 or $1224

• Fed tapering decision strengthened the US Dollar

• US steady growth in fourth quarter undermined need for alternative investment

• Physical demand for gold reduced as China went on one-week vacation

Gold futures for April delivery closed around $1243 per ounce on Friday, hence posting its first weekly decline in six weeks on steady economic growth in the US during the fourth quarter, the Federal Reserve’s decision to reduce stimulus, and low bullion demand from China.

Gold price is likely to find support near $1233, which is the 200 MA at a four-hour timeframe and the only major support level ahead of $1231, i.e. swing low of the previous wave. Furthermore, channel support and the 55 Daily Moving Average (DMA) are also sitting in near $1233. A break below this support zone may open the door for a $1224 price, which is the 23.6% fib level as shown below.

Gold_Falls_on_Steady_US_Growth_Rebound_on_the_Horizon_body_goldprice-dailytrend.png, Gold Falls on Steady US Growth, Rebound on the Horizon?

Last week, when gold was being traded around $1250, I predicted that gold may surge up to $1272 and then begin a correction. The precious metal did exactly the same, price held off $1272 resistance and then pulled back sharply (we saw a high of $1278 tough). My forecast is still same about yellow metal however instead of $1224 we might see a rebound from $1233 as I have explained the significance of that particular support level above.

On upside, an immediate hurdle can be noted around $1250-53, 38% fib level and historical resistance zone for bullion. A daily close above $1250 resistance shall target $1261, that is the 100 DMA and then $1271-78 zone, which is the 50% fib level and the swing high of the previous wave.

Gold prices are very likely to extend an upside movement up to $1292, the 61.8% fib level and the 200 DMA, as shown in the above chart. On Friday, Thomson Reuters/University of Michigan sentiment index showed an upbeat 81.2 reading in January, with analysts expecting an 81.0 read. Consumer spending also jumped 0.4% in December, well above the median projection of 0.2%.

Upbeat economic results supported the Federal Open Market Committee's (FOMC) hawkish conclusion after a two-day monetary policy meeting that ended on January 29. The committee decided another to cut another $10 billion in its monthly asset purchase program. After back to back tapering decisions in the last two meetings, Quantitative Easing (QE) was reduced to $65 billion per month and, as a result, the US Dollar strengthened notably. In fact, the Dollar ended with its best January since 2010.

The negative correlation between the USD and Gold kept the precious metal under pressure last week. In addition, solid growth in the US during the fourth quarter minimized the need for alternative investment. The American economy grew at a 3.2% steady annual rate in the last three months of the previous year despite the government shutdown in October. Gold is also missing physical buying support as its biggest consumer China went on a one-week vacation. All these factors kept bears in control throughout the previous week.

DailyFX provides forex news and technical analysis on the trends that influence the global currency markets.