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A closer look at Gold Trading

Ongoing speculation that the global economy will continue to deteriorate has seen a frenzied demand for Gold commodity trading. The yellow metal hit a six –month high on Friday at USD 952 an ounce.

 

Gold’s safe haven attraction in these turbulent times has been exacerbated by the following factors:
  • Distressingly low investor confidence in currency and capital markets.
  • Fiscal and monetary policies discussed and announced by major governments and central banks across the world lack clarity and vision. They are perceived by investors to be unsustainable and ineffective over the long term.
  • The measures discussed and announced by major governments and central banks involve flooding the markets and banking system with high volumes of liquidity which will ultimately prove to be inflationary and Gold has always been perceived as a hedge against inflation.

Therefore, with the above in mind, as an online forex broker providing commodity trading, we expect demand for the precious metal to continue with the main fundamental driver to be, a hedge against global uncertainties. Over the next few months there is a high probability that Gold will re-challenge its all time high at 1032.70 and possibly exceed it if the global economy keeps deteriorating. Also, worth mentioning is that the traditional inverse correlation between Gold and the US Dollar has broken down over the past couple of weeks and both are moving in the same direction, a telling clue that Gold will sustain its uptrend.

Technical View
Since hitting an all time high at USD 1032.70 an ounce in March 2008, Gold consolidated and after hitting a low at USD 681 an ounce (weekly 200 EMA) started its ascent and recently broke its down trending resistance line from 1032.70 which has fuelled the bullish bias in the metal that could ultimately see it re-challenge its all time high of 1032.70 and beyond. The bullish bias is re-enforced by the fact that over the past couple of weeks Gold has sustained its price above USD 900 an ounce. This price stability over the coming months will be supported by the uncertainty facing the global economy and low investor confidence in capital and currency trading markets.

The weekly chart below outlines our bullish scenario for Gold.
Charts Courtesy of Bloomberg Finance L.P. 
Charts Courtesy of Bloomberg Finance L.P.

From the weekly chart we can clearly see that Gold is steadily moving in an up channel and has confidently broken its downward trending resistance line from the 1032.70 high. The low registered in October 2008 at 681 was at the 61.8% Fibonacci Retracement level of the 542.45 – 1032.70 advance. Therefore, Fibonacci extension theory dictates that price should eventually hit 1277.58 and possibly 1359.94 over the coming months.

However, before reaching these price targets, Gold will encounter strong resistance levels or stumbling blocks along the way at the following areas and traders should be vigilant if price gets there:

  • 988.20 – sees the high made in July 2008
  • 1032.70 – all time high. This level is extremely important and will be very challenging. If confidently broken then the Fibonacci extension targets mentioned above are high probability profit targets.
  • See our indepth Forex trading tutorial 5.4
  • 1172.67 – sees the 100% price distance of the 542.50 – 1032.70 advance

At the time of writing this report, Gold has strong momentum in its favour and is heavily backed by strong fundamentals for a re-challenge of the 1032.70 high.