Transcript
GOLD COMING BACK TO $ 1000!!! 04-AUG-2010 2010
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Contents
Introduction Fundamental Factors Technical Factors Daily Chart Weekly Chart
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Introduction
Gold is the oldest precious metal known to man and for thousands of years it has been valued as a global currency, a commodity, an investment and simply an object of beauty. The total above ground stocks of gold is estimated to be around 1,63,000 tonnes by Gold Fields Minerals Services (GFMS) as on end of 2008. Out of this total stock, 51% is estimated to be present as jewellery, 18% as official reserves, 17% held as investment, 12% used for industrial purposes and 2% is unaccounted for. Economic forces that determine the price of gold are different from, and in many cases opposed to the forces that influence most financial assets. CAPITALHEIGHT, in its earlier report “Glittering gold” forecasted that Gold will be making a new high, given its bullish trend and technical and fundamental factors we evaluated, we forecasted the new high in the range of $ 1240- $ 1250. The crucial factors we considered to validate its bullish trend were many, like, European crisis that fueled the demand for gold in both physical and commodities market, at that point of time, gold was also the perfect currency hedge as the Euro was weakening against Dollar owing to PIIGs crisis, weak global financial markets & the spurt in the holdings of gold backed ETFs’. It was validated in the 3rd week of June when gold made a high of $1265 and since then it hasn’t reversed its downtrend. Gold has played its part. When global financial markets tumbled, Gold was giving returns, opportunity to hedge currency & was seen as safe haven. But, a lot has happened in global financial markets which we need to consider now & see the next trend for Gold. In this report, we are again analyzing the current trend of gold. Given all fundamental & technical factors, we see Gold coming back to $ 1000 in near future. How? Lets’ have a perspective.
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Fundamental Factors
As of now, Gold prices have traded at three-month lows with long liquidation and outflows from ETPs. The speculative length has fallen from record levels. Interesting part is that physical demand is showing signs of emerging in markets such as India, Thailand and Indonesia but not other major consumers such as China. The risk appetite of investors has improved since last 2 months in the international market given sharp rise in equity markets and rise in price of other base metals. Gold prices have been under downward pressure with less-committed investors exiting the market. Signs of economic recovery and improved global equity markets make the yellow metal slightly less attractive in the past few weeks. Gold and silver finished last week with declines of 1.8 per cent and 2.8 per cent respectively. On the other hand, the overplayed Euro crisis is settling down with European markets at a three month high. The Euro zone's manufacturing purchasing managers’ index for July rose to 56.7, which was better than expected. The U.S. also delivered better manufacturing activity for July of 55.5; any number over 50 signals growth. Gold prices are stuck in a tight trading range, and we anticipate more of the same for the rest of the summer. On the one hand, better-than-expected corporate earnings and economic data are pushing investors to dump gold for stocks. Encouraging signs of a global economic recovery decrease gold's appeal as a safe-haven asset. The crucial thing to watch in the global markets was the European banks’ stress test that came out with better than expected. Only 7 banks failed as other 84 banks had required capital adequacy ratio. The European markets also have recovered owing to some good economic data that came in last month like Unemployment change, the M3 money flow in the economy for liquidity.
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During July, the price of gold fell 5 percent. This price drop in July is the first monthly decline since March, and gold has fallen 6.5 percent from its June 21 record of $1,266.50. Holdings in the SPDR Gold Trust (GLD), the biggest exchange-traded fund backed by bullion, declined 1.5 percent last week, heading for the biggest weekly drop since April 2009. In July, holdings in GLD lost over 38 tons. The only reason for Gold to turn bullish again is just weakening dollar but that too wouldn’t sustain gold in a uptrend. As gold make lower lows and lower highs in weekly chart, the bargain hunters will come in, specifically from India and China. Demand in India and China will continue to grow, driven by jewellery demand, in spite of high local currency gold prices. In Q1 2010, India was the strongest performing market as total consumer demand surged 698% to 193.5 tonnes. In China, demand proved resilient; demand increased 11% in Q1 2010 to 105.2 tonnes. This strong demand is despite high local gold prices, which on May 12 in India increased to Rs 56,032/0z, the highest level for the year, while at the same time in China prices reached an all-time high of RMB8,480/oz, suggesting that consumers in India and China are becoming accustomed to higher gold prices. Concerns over Greece’s public finances and debt contagion fears in Europe have led to strong buying in particular for gold coins, bars and gold exchange traded funds (ETFs) during May which may show up in the Q2 2010 figures. While momentum in ETF tonnage paused during Q1 2010, gold ETF flows started to rise strongly again in April and May as investors sought less volatile investments in which to protect their funds against economic turmoil. On 20 May, SPDR Gold Shares (GLD) held a record 1,200 tonnes, with a value of US$46.88 billion. These were some fundamental factors that are very crucial and will decide the trend of yellow metal in coming weeks. The following table shows the detailed consumption of gold.
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Supply & Demand of Gold
2008 Supply Mine Production Net Producer hedging Toatl mine supply official sector sales old gold scrap total supply Demand fabrication Jewelry industrial & Dental Sub-Total Above fabrication bar & coin retail investment other retail investment ETFs & Similar total Demand 2409 -352 2057 232 1316 3605 2570 -254 2316 41 1668 4026 7 13 -82 27 12 684 -1 583 63 604 1250 635 -31 604 5 366 965 677 -97 580 13 296 863 673 -125 549 4 402 947 611 -20 591 15 343 949 2009 % CHG 09 v/s 08 Q1 09 Q2 09 Q3 09 Q4 09 Q1'10*2
2193 439 2632
1759 373 2132
-20 -15 -19
344 79 423
442 94 535
510 97 608
463 103 566
497 103 600
643 215 321 3811
472 234 617 3455
-27 9 92 -9
45 99 465 1032
141 48 57 781
152 36 41 837
134 51 54 805
157 26 4 786
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Technical Factors
A long-term trend line support at $1,175-1,180 was broken which has held well so far since Aug 2008. This also happens to be a Fibonacci retracement point. Going forward, further downside to $1,130 or even lower looks likely in monthly & weekly charts. Only an unexpected rise and close above $1,220 could cause doubts on our bearish view and would force us to abandon it, which is very unlikely to happen. Wave counts are indicating that the impulse moves have ended and corrective ones have started and a close below $1,115 would validate this view. Elliot wave analysis now indicates a possibility of a fifth wave impulse possibly getting over at the recent high of $1,266. A daily close below $1,135 will now confirm the beginning of a possible A-B-C, corrective move has started. RSI is in the neutral zone now indicating that it is neither overbought nor oversold. The averages in MACD have gone below the zero line of the indicator indicating a bearish reversal. Negative divergences are confirmed which is bearish and could result in a sharp fall. Look for gold futures to test the support levels in the coming sessions. Gold continues to make lower lows on the weekly chart and now it has just broken down though a long standing trendline on monthly chart from Q4 2008. Given that the MACD is just crossing to the downside we need to watch carefully as this is quite a critical point of gold. All this and we have already had a downside signal from the Slow Stochastic. Gold could be forming a topping pattern but this has yet to complete. Given the indicators, this is possible in the coming weeks and that will set up a move down to around $1,000. This particular pattern is in its initial process of forming & is too early to see in a chart.
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If you study Fibonacci on gold it works very well indeed both in terms of 38.2 percent and 61.8 percent retracements. The Slow Stochastic too has given us some kind of signal. The weekly chart is starting to look less bullish with this latest pullback on the daily so investor needs to start being a cautious. The correlations for gold are all over the place at the moment and are actually high positive with the dollar which is not normal. Breakdowns in ‘normal’ correlations generally point to a switch in the attitude to risk and gold may seem a correction after a huge rally in just few months. Much bigger picture, we could be forming another top around last year’s December high. Volume has been tailing off which is consistent with such a pattern. Of course we have to watch the weekly chart at the same time for a switch in the longer term outlook. Given below are some values of important indicators for various time periods where we can see that the longer time period indicators are showing weakness as compared to the shorter time period indicators. Period 9-Day 14-Day 20-Day
Raw Stochastic Stochastic %K Stochastic %D Average True Range
92.44% 80.98% 71.51%
62.40% 51.90% 47.71%
45.15% 36.82% 33.12%
16.76 17.50 18.00
Period
Relative Strength
Percent R
Historic Volatility
MACD Oscillator
9-Day 14-Day 20-Day 50-Day 100-Day
58.22% 52.45% 50.73% 51.73% 53.03%
7.56% 19.02% 28.49% 59.34% 36.08%
13.76% 13.89% 13.79% 16.14% 16.20%
+10.11 +6.54 -0.32 -22.47 +3.23
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Composite Indicators
Trend Spotter Short Term Indicators 7 Day Average Directional Indicator 10 - 8 Day Moving Average Hilo Channel 20 Day Moving Average vs Price 20 - 50 Day MACD Oscillator 20 Day Bollinger Bands
Signal
Sell
Buy Buy Buy Sell Hold
Short Term Indicators Average: 40% Buy 20-Day Average Volume - 0
Medium Term Indicators Day Commodity Channel Index Day Moving Average vs Price - 100 Day MACD Oscillator Day Parabolic Time/Price
40 50 20 50
Hold Sell Buy Buy
Medium Term Indicators Average: 25% Buy 50-Day Average Volume - 0
Long Term Indicators 60 Day Commodity Channel Index 100 Day Moving Average vs Price 50 - 100 Day MACD Oscillator
Hold Buy Buy
Long Term Indicators Average: 67% Buy 100-Day Average Volume - 0 Overall Average: 32% Buy
Price Support Pivot Point Resistance
1,200.66 1,178.91 1,196.34
1,213.77
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Daily Chart Analysis
Firstly, In the below gold daily chart we can see gold has broken the trend line support since Jan 2010 quite well and since then it is making lower tops and lower bottoms. Secondly, gold has almost retraced 50% of the rally in the chart. Technically, Gold blends well with 38.2% & 61.8%. Thirdly, the trend line drawn shows the weakness of gold as it is continuously making lower tops and lower lows. 200 day moving average has given good support the same level coincides with the 50% retracement too.
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Weekly Chart Analysis
Coming on the Gold weekly chart, The most crucial factor to see is that Gold has broken its long support line since Q2 2008. If we look at Fibonacci retracement, Gold has almost touched the extension level of 161.8% and technically speaking a top pattern is forming there which supports our bearishness on gold. For the past 6 weeks gold has been forming bearish candles making lower tops and lower bottoms, though there might be some small upward movement in the coming weeks making a lower top in the weekly chart owing to bargain buying. Looking at the RSI, important thing to see is that when gold made a high of $1266, it has failed to cross the 70 line forming a double top pattern and continues to move downward by breaking the trend line which further indicates its overall bearishness.
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Monthly Chart Analysis
To have much bigger picture & much specific trend of gold, lets have a look i the below in weekly chart we can see the weak trend of Gold After touching the high of $1266 it has Gold. made lower top & lower bottom. The support trend line is also broken in this chart. Gold has extended to 161.8% almost. Gold is now forming a top pattern here which is in its initial process. Technically, if it has to form a top pattern, it has to fall at least 15% – 20% i.e around $1040 - $ 1060. In the last month gold has formed the bearish engulfing pattern forming a big red candle, from which we can expect another bearish candle this month and gold could come down to $1035 $1035-1040, which also coincides with the 100% cides level of the Fibonacci retracement.
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