Gold Opens 2014 on Strong Footing- Rally at Risk Heading into NFPs
Fundamental Forecast for Gold: Neutral
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Gold prices are markedly higher this week with the precious metal rallying nearly 2% to trade at $1236 ahead of the New York close on Friday. The advance comes amid thin holiday trade with bullion rebounding off key support at $1179 ahead of the close of 2013 trade. Does this rally suggest that the beaten metal is turning the corner in 2014? The technicals suggest that in the near-term, that may be the case.
As we open up 2014 trade the spotlight remains on the US economic docket as the Fed begins to taper QE operations. We’ll look for the major focus this year to shift from the labor markets towards inflation expectations. As long as the recent improvement seen in the employment figures holds pace, the markets will closely be eyeing the inflation outlook as CPI continues to fall short of the central bank’s 2% target. Overall, you would expect the much awaited tapper to continue to weigh on gold prices but since the $1178 low made on the 31st of December, the metal has rallied more than 4.6%. It may be that much of the “taper” is likely to have been priced in at this point and a round of profit taking early in the year could lead to something more substantial if key levels are taken out. That said, the setup for gold is clean and there are some important things to consider heading into January.
Next week traders will be closely eyeing the return of the US data stream with ISM non-manufacturing, factory orders, ADP employment, trade balance data and the release of the minutes from the latest FOMC policy meeting all on tap ahead of the much anticipated NFP report on Friday. Non-farm payrolls are expected to show the addition of 193K jobs last month, slightly softer than the blowout 203K print seen in November, with the headline employment rate seen holding steady at 7.0%. Look for strengthening US data to limit advances in gold with our broader outlook remaining weighted to the downside below $1268/70.
From a technical standpoint, the rebound seen off our primary objective cited last month at $1179/80 has been impressive and the rally has now surpassed the 0.618% retracement of the decline off the December high. Daily RSI divergence and a 50-breach in the oscillator suggests that a near-term correction is underway and we look higher heading into next week after prices broke through embedded channel resistance dating back to the October highs. The larger encompassing descending channel formation dating back to August high is now in focus with interim resistance seen at $1248. Our broader bias remains weighted to the downside below key resistance at $1268/70. Note that this level converges with operative channel resistance between 11-13th of the month. A break below the December lows puts the larger trend back into play with subsequent support targets eyed at $1151/60, $1125 and $1091. It’s important to note that we are just starting to put in the weekly and yearly opening ranges with price action over the next few weeks likely to offer further conviction on our near-term directional bias. - MB
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