Precious Metals: The Week Ahead

The FOMC’s last meeting minutes have made it clear that the Federal Reserve is much less hawkish than was suggested by Janet Yellen at her inaugural press conference as the Fed chair last month. As there was no mention of the “six months” time frame between the end of QE and start of rate hikes, the markets have taken this as a sign that rates will stay at record-low levels for longer than expected. As a result, gold has become relatively more attractive as a non-dividend-nor-interest-paying asset. The metal has been lent additional buoyancy by the performance of the equity markets this week as all the major indices have plunged due to renewed concerns about the health of the Chinese economy and fears over the outcome of the first quarter US earnings. However, unless the flows into gold-backed Exchange Traded Funds turn positive and increase significantly, gold prices are unlikely to stage a meaningful and sustained rally. But with other precious metals such as platinum and palladium continuing to find support from ETF investors, albeit for different reasons, gold could follow suit. Meanwhile, imports of gold and silver in India, the world’s second largest consumer, fell some 40% in the fiscal 2013/14 year, according to Reuters. Nevertheless, the fall in imports narrowed last month to -17.3% from a year earlier. Demand for gold and silver could increase significantly if India were to reduce their import duties, which is a possibility once the elections are out of the way.

As a result of this week’s rally, the yellow metal is all of a sudden finding itself above both the 50 and 200 day moving averages. The two averages have meanwhile drifted in the “correct order” as far as a bull market is concerned after the relatively-fast-moving 50-day SMA crossed above the 200-day SMA a few weeks ago. Ironically, this so-called “golden crossover” occurred at a time when the underlying gold prices were plunging. The two averages being in this order is a prerequisite for some types of hedge funds and other speculators who may be bullish and want to buy the underlying assets. With everything else being equal, the golden crossover itself is thus likely to attract those sorts of speculators who would otherwise have not looked at gold for buying opportunity or even those who were previously bearish on it. Gold’s ability to rise further next week partly depends on what happens around $1320/5, which has already been tested a couple of times this week. This area was previously support and ties in with the 38.2% Fibonacci retracement level of the down move from the March peak. The 50-day moving average and old resistance level of $1315 could turn into near-term support. A potential break below $1315 could expose the 200-day moving average and bullish trend at $1300 for a test. Our bias remains bullish while this trend line remains intact on a daily closing basis.

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