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Gold Poised to Decline as Recovery Curbs The Yellow Metal’s Demand

Gold Poised to Decline as Recovery Curbs The Yellow Metal’s Demand

2011-02-04 22:16:00
Michael Wright, Currency Analyst
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Gold_Poised_to_Decline_as_Recovery_Curbs_The_Yellow_Metals_Demand_body_TOF204gold.jpg, Gold Poised to Decline as Recovery Curbs The Yellow Metal’s Demand

Gold Poised to Decline as Recovery Curbs The Yellow Metal’s Demand

Fundamental Forecast for Gold: Bearish

The rally in gold this past week is expected to be short-lived as the global recovery slowly gathers pace. Indeed, price action remains capped by $1360/oz for the second consecutive week. So long as the bullion remains capped by this level, downside risks remain.

For most of last week, the yellow metal was relatively unchanged as global developments painted a mix outlook. Speculation that the European Financial Stability Facility would be able to purchase government bonds eased debt fears for the time being, and fueled expectations that the European Central Bank would be able to proceed with an exit from its emergency measures. The result paired with inflation concerns in the bloc helped to ease upward momentum in the gold. However, gold witnessed its biggest gain last week when ECB president Jean-Claude Trichet held a cautions tone at his press conference subsequent to the bank‘s interest rate announcement. The central bank head said that risks for growth remains tilted to the downside, while noting that price stability will be maintained over the medium-term. Though they should not be forgotten, currency traders will place Mr. Trichet’s comments aside and place the spotlight back on the EFSF. As EU officials continue the debate surrounding the ability of the EFSF expand their bailout efforts, failure to meet market expectations will not only lead to a selloff in the euro, but may also push gold higher. The advance in the yellow metal in the case of this event occurring may be short-lived as global developments outside of the Euro-Zone show a brighter outlook.

Aside from EU leaders meeting in Brussels, gold traders will place their attention on the Bank of England’s interest rate decision and asset purchase target for the month of February. At the same time, the U.K. calendar will also highlight producer prices. Meanwhile, U.S. University of Michigan confidence will be released on Friday. All in all, following the result the EU meeting or the lack there of, gold is expected consolidate. From a technical perspective, on the weekly chart, gold remains capped by the 20-day simple moving average, while the MACD crossed over to the downside earlier this year and has yet to reverse course. Going forward, the next key level of support will be $1300/oz, which coincides with the 38.2 percent Fibonacci retracement on the February 2010 low to December 2010 high. -MW

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