Precious metals surge on haven buying

Precious metals have surged higher, even though the Indian government may have disappointed a few by refusing to reduce the import duty on the metal as it unveiled the 2014/5 budget today. It looks like the price of gold has been driven, above all, by safe haven buying as other risk assets such as stocks and crude oil have dropped sharply and extending their recent weakness. While crude oil has fallen on receding supply worries, stocks have sold off mainly on concerns about the health of Banco Espirito Santo which has caused bank shares to lose ground across the board today. With BES being the largest Portuguese bank, the market is refusing to ignore its potential impact on Portugal and other eurozone peripheries. Also boosting the appetite for safe-haven assets has probably been the escalation of the conflicts between Israel and Palestine.

From a technical point of view, the spike in the price of gold was probably fuelled by the fact that a large number of stop loss orders, sitting above the recent two-week consolidative range, were tripped which forced many bearish speculators to abandon their positions. As can be seen on the chart, the yellow precious metal had struggled to break through the $1325/30 area in recent days. But the fact that the pullback from there was only 10-15 bucks each time, it correctly suggested that the control was with the bulls. Now that another major hurdle has been broken, the bears’ control has correspondingly diminished. As more and more resistance levels fall, we will likely see further position squaring by the existing sellers. Meanwhile speculators who have been on the side lines are likely to come back into play as the metal climbs higher. But with one resistance area cleared, another is fast approaching around $1355/60. This is where a medium-term bearish trend line meets the 78.6% Fibonacci retracement level of the down move from the Mark high of $1392. If and when this area is taken out then I would not only expect gold prices to reach that March peak, but break above it too and head higher.