Gold & Silver; Breakout lower!

Bullion Round Up

The US dollar index has risen past the 80.30 level in a short space of time. The recent rise was fuelled by a test of the neckline at 78.90 areas that failed and investors started to buy into the safety of US treasuries once again. The strength in the dollar usually indicates a safe haven appeal where investors park their cash for little or no return. At the same time, we are also experiencing a bullish equity market particularly in the US rather than its Europe counterpart.

Bullion prices remain capped in a tight trading range and could maintain such range in the next few weeks. We have repeatedly mentioned the lack of catalysts, correlations as well as barriers for bullion to be bullish. However, we would like to revisit the fundamental situation that remains supportive on bullion prices in the long term. Europe may be recovering but the rate of recovery remains fragile. In addition, we have the US debt ceiling and automatic spending cut that could send the economy back to recession. The escalation of currency wars among several countries could set up a major currency debasement. Long term investors should consider all the above scenarios and possibly allocate their wealth into bullion to protect their wealth.

Economic Round up

Asian market will remain quiet since China is on holiday for the rest of the week. This week, investors are shifting their attention to the Eurozone as well as US economic data.

For the remainder of this week, we will have the G20 finance minister and central banks talks which will be the key event for FX markets. We would not be surprise if the topic on currency war revisited during the talks. We will also have the Bank of England inflation report, US core retail sales, French and Germany GDP reports. The crucial date lies on the 24th and 25th February with Italian elections that could change the political landscape.

Gold Technical

Short Term: Gold break below the short term uptrend line of the triangle and the breakout is heading lower. We are now bearish as per our recommendation to short the market should it break below $ 1652. The yellow metal eventually found support at $ 1643.60 area in this thin market – lunar New Year holiday and snow storm in the USA. We anticipate a breakout from our previous commentary – giving two different scenarios of a potential upside and downside breakout.

Medium Term: We would like to take a more cautious bearish stance for the next few weeks. The reason is because many investors who are on the side line will be tempted to go long should prices break lower. This is the case when gold traded the January low of $ 1625 before dip buyers re-enter the market. Technically, the MACD is still rolling negatively and the stochastic is moving lower. We expect bouts of consolidation that may be well supported by dip buyers.

We entered a short position on gold at $ 1652 and targeting $ 1638 as potential profit taking area with a stop loss at $ 1658. Look out for any dip buying that could reverse the bearish stance. We would not be surprise if Eurozone uncertainty as well as Mr. Obama spending cuts that fall on the 1st of March as the next catalysts for gold to propel higher. Resistance: $ 1664 (200 DMA), $ 1674 (50 DMA), $ 1686, $ 1697 (previous high) Support: $ 1635, $ 1625 (January low), $ 1600 (psychological level)

Silver Technical

Short Term: In our previous commentary, we warned that a break below the 4 hourly uptrend lines bode bearish momentum and we look to short the market on that signal and we did. We shorted the silver market at $ 31.30 level and targeted $ 31.00 area which we achieved.

Medium Term: Silver is still trading above the 200 DMA of $ 30.65 where the next support lies. Technically, the stochastic breaks lower which indicate more selling pressure ahead as we expect more consolidation. We remain neutral bearish as the MACD continue to roll in the negative zone.

Silver broke below the $ 31.23 level and gives way to a low of $ 30.83 before recovering back above $ 31.02 area. We remain bearish and may look to short the market again on any bounce.
Resistance: $ 31.23, $ 31.60, $ 32.47 (month high), $ 33.54 (downtrend line), $ 35.35 (October high) Support: $ 30.65 (200 DMA), $ 29.25 (January low)

Currencies