Negative rates & uncertainty favoured gold

Gold, weekly

Uncertainty has pushed funds into safe haven assets into Gold after the BoJ has adopted negative interest rates. Now that negative interest rates seem to be adopted by a wider group of central banks the old complaint about gold being a non-yielding asset class has lost some of its power. A trend in the world of central banking to penalize cash positions by making it costly to save cash has driven money into gold. It has suddenly become a better alternative. It’s still not yielding anything but in times of trouble it is known to give sizeable returns via capital appreciation. It seems that in the coming months and years we have a world where cash becomes even more costly as central banks are desperately trying to create inflation via negative interest rates.

Over the last month gold has risen 13.3% to a significant resistance at around 1240-1250 as the level coincides with the descending channel high and 50% Fibonacci level (as drawn from August 2013 high to the latest low). In the weekly picture gold is now trading way above the upper Bollinger bands with Stochastics deeply in the overbought territory. This is the biggest move above the 50 week SMA since August 2012 and tells about a momentum change in Gold.



Gold, 240 min

Gold has rallied from the bottom we identified in a Live Analysis Webinar in the beginning of January. The move exceeded all our targets and has now become quite extended and as it’s trading near a resistance, also potentially vulnerable. Since touching the 50% Fibonacci level and peaking above the upper end of the long term bearish price channel price has corrected slightly in intraday price charts. Stochastics is overbought in the 4h chart.

Conclusion:

Gold might have more upside in the longer run judging from the increased risk aversion in different asset classes but in the short run the upside is, likely to be limited due to the channel top and 50% Fibonacci retracement being near. This could mean that the line of least resistance is for a change on the downside and traders could benefit from short exposure while (potential) correction takes place. As per usual, we need price action based confirmation for the idea. We look for sell signals inside the above Resistance area at 1238 – 1251 with the following targets areas: 1198-1206 (T1) and 1180-1190 (T2).