The rally in the dollar has created headwinds for gold futures prices, pushing the yellow metal toward support levels. Dollar strength has come on the heels of better than expected U.S. data that has push interest rate differentials in favor of the dollar. Gold forward rates have also increased, which has made holding gold more expensive for investors.
Despite the recent decline in gold prices, managed money continued to increase their holdings as reported by the CFTC. According to the most recent Commitment of Traders report for the week ending Feb. 5, 2013, managed money increased their long positions by nearly 5,000 contracts. Short positions remained basically unchanged. Many experts, including GFMS and Bullionvault, expect the long term outlook to be positive although HSBC and Morgan Stanley have recently cut their growth forecasts.
There are a number of data points that could generate volatility for gold prices during the week. The G-20 is scheduled to meet in Russia later in the week and this will be preceded by the EU finance ministers meeting that begins on Monday. Although the ECB failed to make a fuss about the recent rise in the euro, the climb vs. the yen is likely to become a soar point if the yen continues to devalue. Germany is an export led economy, and the recent surge in value makes German exports less commpetitive.
On the central bank front, the BOJ meets later in the week to determine any changes to their interest rate policy. Since their last meeting a month ago the dollar has moved higher against the yen by nearly 3 big figures. The BOJ in their last meeting announced an open ended bond purchase program that is scheduled to begin at the start of 2014, when the current program is scheduled to terminate. The BOJ also tied quantitative easing to inflation and now is targeting 2% as a goal.
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Technically, gold futures prices are consolidating in a range between $1,690 and $1,650. A close below support at $1,650 would likely lead to a test of a downward sloping trend line that has been created by a channel than incorporates the current downward sloping trend of gold futures prices. Short term resistance is seen near the 10-day moving average at $1,669, and then the highs seen near $1,680/$1,690.
Momentum on gold futures prices has turned negative with the MACD (moving average convergence divergence) index generating a sell signal. This occurs when the spread (the 12-day moving average minus the 26-day moving average) crosses below the 9-day moving average of the spread. The index moved from positive to negative territory confirming the sell signal.
The RSI (relative strength index), which is an oscillator that measures overbought and oversold levels, is showing negative momentum acceleration and is poised to test the lows seen in mid-January. The RSI is now printing near 43, which is on the lower end of the neutral range (an RSI level above 70 is considered overbought while levels below 30 are considered oversold). A breakdown in prices action on gold prices is likely to coincide with a breakdown of the RSI below the 37 level.