For the chartists, it will be important to see that gold holds the $1,348 closing level of 15 April.
A number of factors have led to its recent sell-off. These include the ascendancy of the dollar, which on a trade-weighted basis is up 2% in the past few days and 7% from mid-September.
At the same time, global financial markets have become more pro-growth and pro-cyclical, while most indicators of inflation have come in well below market expectations in recent days. High-profile investors such as George Soros are also reported to have been sellers through exchange-traded funds (ETFs) in the first quarter of the year.
QE effect
However, it is important not to forget quantitative easing (central bank asset purchases or QE) – which undermines confidence in currencies and makes gold more attractive as an asset – is still very prevalent around the world.
Not only is the Bank of Japan expanding its balance sheet with great vigour, but the US Federal Reserve has explicitly left the door open to more QE if the economy needs it. In the eurozone, an expansion of QE is likely to follow the recent cut in interest rates.
Props
There was a sizeable increase in retail demand for physical gold when the gold price fell heavily in April. And today’s World Gold Council report shows that, even prior to that significant setback, jewellery demand was strong over the first quarter. Indeed, US jewellery demand showed the first year-on-year increase in five years.
The gold market is very technically driven at the moment, so the price needs to hold near current levels for there not to be a fresh wave of selling down to $1,200.
If the $1,350 level holds, we expect the market to trade in the relatively tight range of $1,350-$1,480, as retail demand for physical gold continues to provide support while investors keep selling into any rallies.
Which Japan equity fund manager thinks more is needed to ensure the recovery in Japan is sustained? Find out here…
