Gold Rebounds as Stocks Retreat- Is It Time to Buy?

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Gold Rebounds as Stocks Retreat- Is It Time to Buy?

Fundamental Forecast for Gold: Neutral

Gold posted a modest recovery this week with the precious metal advancing 2.12% after last week’s 6% decline to trade at $1388 at the close of trade in New York on Friday. The rally marks the biggest weekly rise in a month as stocks retreated and talks of possible cessation of QE operations eased. So, is this rally real or should we be looking for fresh short entries?

Expectations that the Federal Reserve may start to taper back QE operations kept gold prices on the defensive early this month as data flow continued to suggest that the economic recovery is on a more sustainable path. During Bernanke’s testimony before the joint congressional committee, Fed Chairman noted the risk associated with a prolonged zero interest rate policy and noted that the FOMC will be closely watching incoming data when considering when to begin pulling back on asset purchases. However remarks made by St Louis Fed President James Bullard on Friday suggested that before he would vote to scale back stimulus measures, inflation would need to pick up. As such, gold prices (although higher on the week) maintained a clear range between $1357 and $1397 with price action suggesting that a near-term low may be in place.

The US economic docket is rather light next week, offering little guidance for gold traders. However, investors will be closely monitoring central bank rhetoric with Eric Rosengren and Sandra Pianalto scheduled to speak next week. Look for gold to take cues off of broader market sentiment with this week’s decline in equity markets marking the first three day losing streak for the Dow this year. Should stocks continue to underperform gold prices could catch a bid as investors seek to diversify away from risk correlated assets.

From a technical standpoint, the gold trade gets a little tricky here with prices seemingly carving out a near-term low with a break above Fibonacci resistance at $1397 risking a more significant topside correction. Such a scenario eyes resistance targets at $1424- $1430 with only a breech above $1487 invalidating the broader downtrend. Interim support rests at $1357 with a break below this mark (on a daily close basis) opening up our primary objective range of $1302- $1307. With limited event risk next week and the close of the month on tap, we will maintain a neutral bias pending a break of this week’s range. -MB

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