Gold chipping away at key resistance as safe haven demand grows

New York (Oct 20)  Gold has now risen for two straight weeks after bouncing off the technically-important $1180/85 area at the start of the month. For a time last week, the metal was up a good $65 from that low ($1183), representing a gain of 5.5 per cent. Although gold’s rally faltered somewhat at the end of last week – undoubtedly due to the stronger dollar and the kick-back rally we saw in the stock markets, which reduced the demand for safety – the metal nevertheless remained near the highs and is up once again today. Gold’s resilience here not only points to more gains, it also suggests that the stock market recovery could be short-lived otherwise the need for the safe have asset would have surely been less. The rising price of gold has been matched with increased bullish speculation. According to the CFTC, net long positions in the week to 14 October climbed by 12,333 contracts. At 42,196, net longs were at their highest level in 5 weeks. Meanwhile ETF inflows have likewise risen in response to the plunging equity markets.

The key question is whether the recent bounce back from the $1180/85 area is the start of a triple bottom pattern or another false hope for the long-term bulls. While it is too early to make any conclusions, the general “risk off” tone across the financial markets suggests a bottom may have been formed, at least in the short to medium term anyway. It is encouraging to see gold chipping away at resistance around the $1240/45 area. As well as support and resistance in the past, this $1240/45 area also corresponds with the 38.2% Fibonacci retracement of the downswing from July. If gold were to close around these levels, or better, then it could lead to follow-up technical buying on Tuesday. The next key area is around $1283/6 – this is where the 200-day SMA meets the key 61.8% Fibonacci retracement level. To get there, gold will first need to break through its 50-day moving average at $1249/50, which is currently offering resistance. Meanwhile the key support level to watch is around $1220/2; if gold breaks below here then a revisit of the $1180/5 area could be on the cards. In the immediate short term, $1240 and $1232 are also important support levels to keep an eye on.