Gold downside and test of $1180 likely

Gold continues to trade through key support levels, and my bias over the short and medium term is for a re-test of the $1180 low from 28 June.

A simple look at the daily chart shows momentum-focused tools heading lower. Thus rallies could be viewed as a good selling opportunity, in my opinion. Yesterday’s close below the 15 October pivot of $1251 could be important, while gold has firmly closed below the 61.8% retracement of the June-to-August rally at $1277.

Bond yields weigh on sentiment

Fundamentally, the rise in US bond yields (think opportunity-cost) is subtracting from sentiment towards gold, although this is a function of increased near-term tapering expectations. Inflation is falling or stabilising at low levels in key developed economies. While this lends support to longer easing measures from a number of central banks, in recent years gold has been bought by traders trying to hedge against future inflation forces driven by the massive increase in global money supply and currency debasement. Clearly that trade hasn’t worked well.

The impact of QE and employment numbers

The European Central Bank could feasibly be looking at the merits of QE further down the line. And we all know that the Bank of Japan is trying its best to engineer inflation forces of 2% by 2015. However, both these central banks pale into insignificance in comparison to the weight of the Federal Reserve, in the market’s eyes. A look at both the FOMC minutes and the comments from St Louis Fed Chairman James Bullard yesterday suggests that we simply can’t rule out a tapering exercise from the Fed in December, although I still feel March is the likely date. James Bullard has put the emphasis on the 6 December US payrolls report, so this employment data is developing enormous significance for the markets. In European trade today we’ve seen a solid weekly jobless claims report, with the level of new claimants falling on the week and coming in below expectations. Again, this is negative for gold.

Opportunity to sell gold

With the exception of physical buying, the upside in gold comes from deterioration in US data. However, from what we’re seeing in the weekly, daily and short-term charts, momentum is favoured to the downside. Personally I would look to short gold on a slight rally to $1250, placing a stop at $1305 (above the November 14 high) and a limit of $1185.

Spot gold chart

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