The week ahead: Equities and commodities
If calls for an earlier Fed rate hike increase, then so too could the buying pressure on dollar. This in turn may weigh further on the buck-denominated gold next week. But the dollar actually conceals the underlying strength in gold, for the metal has actually put on a decent performance against the euro lately (see the chart in figure 3). With the ECB about to embark on a potentially open-ended QE from Monday, the single currency could lose further ground. This may boost the appeal of gold as an attractive alternative to fiat currency. In the long-term, once inflation returns, demand for gold as a hedge against rising prices should increase too. Meanwhile demand for jewellery purchase in countries such as India and China is only set to grow. So, although gold may appear doomed in the short-term, our long-term view is still pretty much bullish on the shiny metal.
Whereas gold in euro terms is holding above all of its main moving averages, against the dollar, it is a completely different story. Therefore any pause in the dollar rally could see a corresponding bounce in gold prices. The opposite is obviously also true. At the time of this writing on Friday afternoon, gold was holding below the long-term support around $1,180 and was only a few bucks off $1,170 which is where a couple of Fibonacci levels converge (78.6% of AB and 161.8% of CD). If it goes on to break below the $1,170 level next week then a pullback towards the November’s low of 1130 could be on the cards. Meanwhile the key resistance levels to watch are at $1,190, $1,200 and $1,220 – levels that were previously support and/or resistance. A potential closing break above $1200 would put an end to the bearish trend.