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The gold price has shot higher today and is close to the key $1,600 resistance level. After falling to an 8-month low it looks like the gold bugs have started to buy up the yellow metal at "bargain" prices around $1,575.
Why the rebound in gold?
- A lot of the bad news weighing on gold - like weak global inflationary pressures and a drop in demand from Chinese and Indian consumers - seems to be priced in.
- The dollar rally may have petered out a little after last week giving the gold price room to breathe.
- In the past we have seen the physical gold market support prices after declines to multi- month lows, as the bargain hunters come back in.
- Gold is may be driven higher by the positive tone in other rare metal prices like palladium.
The last point is worth looking at. Palladium is at its highest level since mid-2011. One of the reasons has been the pick-up in demand for autos in the US, as palladium (along with platinum) are used for catalytic converters that convert up to 90% of harmful gasses expelled from car exhausts into less harmful substances.
Gold is not an industrial metal and is thus not as linked to the US economic rebound, however, the yellow metal tends to follow the trajectory of palladium prices closely. Some basic correlation analysis shows that the gold price has moved with palladium prices more than 70% of the time in the last 12 months, this compares with 56% of the time for platinum. Since the start of the year this correlation has dropped back to 63%, however, it is still significant.
Thus, gold could be dragged higher by strength in palladium prices.
Figure 1:
Source: FOREX.com and Bloomberg
The palladium price has rallied to an 18-month high this morning, however it is approaching a key resistance level that could thwart the bulls ahead of $800. There was a bearish harami candlestick pattern earlier this week, suggesting that the market is taking profit ahead of $800, which is now a key resistance level. If the bulls have enough puff to push above here then we could see a move back towards $810 and then $850 - the high from mid-2011.
Figure 2:
Source: TRADE at FOREX.com
What does this mean for gold going forward?
We still tend to think that the longer term trajectory for the gold price will be challenging as inflation pressures remain muted and the dollar extends recent gains. However, we could see pockets of strength in the gold price if: 1, dollar gains are uneven and include periods of weakness and 2, if palladium can get above the $785-$800 resistance zone.
Key resistance levels to note in the short term: $1,595 - 21-day sma - then $1620 and $1,635. Above here would cause me to readjust my view and look for a sharper mover back towards $1,675 and then $1,700.
Figure 3:
Source: FOREX.com
Best Regards,
Kathleen Brooks| Research Director UK EMEA | FOREX.com
d: +44.(0).20.7429.7924 | f: +44.(0).20.7929.2010 | M: +44 (0) 7919.411.957 | e: kbrooks@forex.com| w: www.forex.com/uk
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