Gold traders still undecided about direction

Friday saw a big reversal in the price of gold following the publication of the US jobs report for the month of September. It is fair to say that the jobs data surprised a few people and confused others, causing both the dollar and stock markets to initially drop while gold surged higher. The initial reaction to the poor US jobs report suggests that investor concerns about the weakening of global economic recovery intensified further, which is probably why the equity markets fell. However following the initial reaction, equity markets soon turned sharply higher as traders remembered the good old formula of “bad data equals good news” for stocks as the chances of the Fed keeping rates low for longer increased. The rebounding stock markets caused the positively-correlated USD/JP currency pair to rally off its lows while the EUR/USD, which tends to correlate negatively with stocks, fell. This is why the Dollar Index was able to come off its earlier lows quite sharply. Yet the buck-denominated gold was able to maintain most of its gains and the metal is still trading near Friday’s highs. The precious metal is therefore displaying some bullish characterises and may be able to extend its gains further if the dollar and to a lesser degree stocks retreat from their current levels this week.

However there are a few missing pieces of jigsaw though. These include the still-bearish market sentiment, the lack of global inflation and lacklustre physical demand. For these reasons I remain sceptical about whether this latest bounce will transform into a sustained rally. Indeed, should the metal refuse to break higher soon, we could see a sharp unwinding of those bullish positions that were opened on Friday. It could be that the level of speculative interest in gold is still not high enough to cause the metal to push decisively higher. Evidence of stronger physical demand combined with better market and economic conditions are probably needed before sentiment turns decisively bullish.

That being said, more short-term gains could be on the way if the metal manages to break above the bearish trend line that has been in place since the start of the year, around $1140/2. A decisive break here could lead to a rally this week towards (some of) the following levels next:

• $1165/70: previous resistance and 38.2% Fibonacci retracement of XA price swing

• $1178/80: 200-day moving average

• $1190/92: point D of an ABCD pattern, 127.2% Fibonacci extension of BC and 50% retracement of XA price swings

• $1215/20: extended point D (1.618) of an ABCD pattern, 161.8% Fibonacci extension of BC and 61.8% Fibonacci retracement of XA price swing; in other words, a Bearish Gartley entry point

However, if gold fails to break decisively above its bearish trend then it may fall back all the way to its 50-day moving average around $1120. Indeed, it could even break the short-term bullish trend line, which would be a very bearish outcome for the metal.