After a weaker start yesterday gold turned sharply higher to close in the positive territory. The precious metal has since extended its gains to trade around $1220 at the time of this writing. Gold’s rebound at the key $1200 mark should not come as a surprise for our technically-minded readers. We have been banging on about the technical importance of this level for a number of weeks now and fully expected it to drop to this level (some of our recent reports on gold could be found HERE, HERE, HERE, HERE and most recently HERE). The $1200 is a key technical level because first and foremost it is a psychological round number, but more importantly this is where a bullish trend line converges with not just one but two important Fibonacci retracement levels. One of these Fibonacci levels is the 61.8% retracement of the upswing from the November low, which comes in at just below $1199. The other is the 78.6% retracement of the upswing from this year’s low point, at just above $1197. Unsurprisingly therefore, gold’s low point yesterday was made between these levels, namely at just below $1198, as some bearish speculators booked profit there while the bulls took advantage of oversold prices and went long.
As a result of the rally, gold has broken back above its 100-day moving average and is currently testing the previous support at $1220. While there is a possibility for gold to turn back lower from here, a closing break above this level could expose the 50-day moving average at $1230 for a re-test. Meanwhile a decisive break below $1200 would be a particularly bearish outcome. While it remains inside this $20 range, the direction of gold’s price is bit unclear but we are leaning a little bit to the bullish side of the argument.
Gold’s fundamental outlook remains bleak in the near term
From a fundamental point of view, we remain sceptical that gold’s rally will last long, for we still hold the view that at these deflationary times and central banks’ on-going race to the bottom for interest rates, equities will provide better yields than gold. But that’s not to say gold is doomed. Indeed, the on-going situations in Ukraine, Greece and across the Middle East, among other places, should help to support the view that there is at least some safe haven demand for the metal. And news that the FOMC is thinking about delaying the first rate hike may benefit US equities the most, but it could also hamper the dollar’s rally; a weaker dollar may boosts the appeal of the buck-denominated gold in the short-term. In the physical form, central banks are continuing to purchase bullion in large quantities as they diversify colossal amounts of fiat currency reserves into one of the only tangible assets they can hold in their reserves. The physical demand for gold, particularly in China and India, is also set rebound this year, according to the World Gold Council. However the global supply of gold is still more than adequate relative to demand and unless prices fall further and remain low, production is unlikely to be cut back noticeably. For most precious metal miners, a price of $1000 per ounce of gold is still profitable. Given that it will be in the miners’ interest to produce gold for as long as the marginal costs outweigh marginal revenue, one can only assume that there will be no shortage of supply any time soon. Thus, if gold were to stage a massive rally in the coming months or years it would most probably be because of a perceived increase in demand. More likely, it will be because of what happens in the paper rather than the physical market. In this regard, we don’t see any good reason why investors would all of a sudden purchase huge amounts of gold futures and options. After all, we are potentially heading into deflationary times.