Gold jumped to six-month high, poised for reversal

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Investor Sentiment Injects Caution Into The Commodities Markets

Investor Sentiment Injects Caution Into The Commodities Markets

Gold jumped on Wednesday to the highest level in more than six months as the tension between Russia and the west has spurred the safe-haven buying. The yellow metal is expected to resume correction from $1373 an ounce which appears to be a huge hurdle for the bulls.

Technical Analysis

At the time of writing, Gold is being traded around $1364. The precious metal is likely to test the strong resistance area near $1373 which is the 76.4% fib level as demonstrated in the following daily chart. A break and daily closing above $1372 might accelerate the upside momentum, opening doors for $1420 and then $1450 that, however, appears a less likely scenario.

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On the downside, the yellow metal is likely to find support around $1335 that is the 61.8% fib level and then $1300 handle which is the psychological level as well as the medium-term pivot zone for the metal. Gold has already turned the long term bias into bullish after printing the Higher High (HH) on the daily chart.

The technical indicators have started showing overbought readings. Commodity Channel Index (CCI) is giving 211 points reading right now which is considered an indication for extreme overbought sentiment among traders. Similarly, Relative Strength Index (RSI) is also in the overbought zone.

Russia-West Standoff

The European Union (EU) and the US are looking set to impose sanctions on Moscow as its troops have occupied the Russian-speaking Crimea. In response to the possible sanctions, Russia said that the restrictions could have grave consequences on the Russia-West ties. Historically speaking, investors tend to buy gold as “Safe Heave” in uncertain geopolitical situation and the same trend is being observed these days. Gold has surged more than $30 an ounce during the last 24 hours.

China Slowdown

On Saturday, government reports revealed that the exports in China slid down by 18.1% in February, missing the forecast of 6.8% increase as compared to 10.6% increase in the previous month. Likewise, the trade balance data also remained worse than expectations with $22.98 billion deficit compared with $31.86 billion surplus in the month before, analysts were expecting $14.50 billion surplus in February. It is pertinent that the Manufacturing Purchasing Managers Index (PMI) report of February had also showed manufacturing slowdown in China for the second straight month. The Asian nation is the biggest consumer of Gold.

Fed Tapering

On March 19, the Federal Reserve is going to announce its decision on the pace of the stimulus worth $65 billion. The central bank is expected to reduce the Quantitative Easing (QE) by $10 billion to $55 billion a month after the surprise jump in February nonfarm payrolls. If it happens, then gold shall resume the correction phase because the precious metal is negatively correlated to the US Dollar (USD).

Conclusion

So the overall macro-economic scenario is mixed for the yellow metal. Technically, I expect a spike up to $1373 and then some meaningful correction towards $1300 handle or even below. Selling around $1373 might be a good strategy. 

To contact the writer of this story: Usman Ahmed at usman@forexminute.com