Gold Advances to Eleven Week High- Rally at Risk Amid Taper Talk
Fundamental Forecast for US Dollar: Neutral
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For the third consecutive week, gold prices are firmer with the yellow metal advancing more than 1.42% to close at $1396 in New York on Friday. The bulk of the gains were seen on Friday as US new home sales marked the largest decline since May of 2010, curbing expectations that the Fed may look to taper next month. However a deeper look at the metrics reveals constraints on the supply side (home inventories), as opposed to waning demand. As such the advance seen in gold prices on Friday may be at risk as bullion heads into resistance at the psychological $1400 barrier.
Beyond the scheduled event risk for next week, there are a slew of Fed officials set to speak ahead of the September FOMC meeting where many are anticipating the central bank to begin tapering QE operations. In light of the recent comments from St. Louis James Bullard, a voting member this year, it seems as though he will continue to show his support for the highly accommodative policy stance despite the growing discussion to scale back on QE. Nevertheless, should we see a growing number of central bank officials turn increasingly upbeat towards the economy, taper expectations may limit further advances in gold prices in the near-term.
From a technical standpoint, gold broke above key interim resistance this week at the 61.8% Fibonacci extension taken off the June lows at $1376. Bullion spent the entire week consolidating below this level before breaching on Friday as the dollar fell on dismal new homes sales with prices closing at near-term resistance. We noted last week that “daily RSI has now broken above the 60-threshold for the first time since August 2012 with price action surpassing the previous monthly high for the first time since October 2012- both constructive developments for gold.” As such, we continue to look for a new high to offer short entries in the near-term with broader prospects remaining weighted to the downside below the 100% extension at $1440. A breach above this mark risks a run on the 50% retracement taken from the 2012 highs at $1487. Interim support now rests at $1367 with a break below this week’s low targeting $1336.-MB
Written by: Michael Boutros, Currency Strategist
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