After breaking the 1,400/ confluence with 161.2% Fib ext level back in mid May, gold has attempted to climb back above the level on no less than 3 occasion. However, all 3 occasion has failed miserably, with high candle wick above the 1,400 showing that bulls did manage to foray above but unable to hold onto the gains, which is a showing of strong bearish sentiment above 1,400. Last week marks the 4th attempt, but price did not even manage to tag the aforementioned line. Bulls could be forgiven though, as the test only came late Wednesday, with price successfully negating the initial bearishness to climb from a 1,366 low to a high of 1,395. With such a short runway to attempt 1,400 again, not able to tag 1,400 is understandable, as long as the uptrend remains intact. This much was true, as price did dip back to around 1,378, finding support and reattempted to climb up higher, in a move that spilled over on Monday morning.
However, since then, price has been on the road down-south, breaking interim support around 1,387 but finding support from the rising trendline. There was still a ray of hope that price may rebound again and launch a proper test of 1,400, but that was also dashed with price breaking the rising trendline in quick fashion, finding 1,378 support once again. From a technical perspective, if price manage to rally from here but yet to reclaim back the rising trendline, bias will remain to the downside, and open up another possible retest of 1,378 again. If 1,378 fails to hold, we could see a quick capitulation of price towards 1,366 and potentially an extension of current bear run which started back in Mid May.
The bearish breakout from the Weekly Descending Channel remains in play. If short-term bears are able to extent the Mid May run, the lows from April 2013 may be tested, with a break opening up the 261.8% Fib extension closer to 1,150. Fundamentally, Gold has been in a bear trend which has been exacerbated this year due to the newer highs forged by US stocks. The higher alpha returns coupled with potential dividend yields on US stocks YTD has been attractive, and prompt traders to clear their gold positions to re-enter the market.
Some believe that the decline in Gold is related to the rumors surrounding Fed tapering of QE3. However that may be a long shot considering that recent peak in Gold price is found with Fed’s announcement of QE3. By the time QE3 was announced, traders already noticed the lack of inflation risks from QE1 and QE2, and hence were not as bullish in gold for inflation protection. Therefore, even with FOMC event risk coming up on Wednesday, it is unlikely that Gold prices will trade considerably lower even if Fed announce a stoppage of QE3. The same would apply even if Ben Bernanke continue to endorse QE3, the impact of QE3 and Gold prices just isn’t there anymore, or at the very least not as strong as before. Instead, traders may wish to look at USD prices as that appears to be the main driver for both FX and Commodities in 2013.