Technicals Drag Gold out of the Water but will it be Enough?

Looks like we were right about gold prices' imminent reversal, but sustainability will heavily depend on fundamental news.

With gold having risen over $35 since my last writing on technicals coming in for a save, I'm still not one to pat myself on the back. As I also mentioned previously, fundamental news from both the U.S. and China can severely affect price direction.

First, let's take a look at the recent technicals as of 1AM PST today (with gold measured on the XAU/USD pair chart):

Looks like gold managed to break through the fickle $1,676 resistance level (now support) and ALSO brushed just past the 200 day moving average. In past tutorial-type articles, I've mentioned how the major moving averages can also act as support and resistance and here we are in a bit of pickle. Sure one can say that price action is just above the 200 - but not by much. Whenever prices are in such close proximity to a level, that level can still act like a magnet. It's kind of like a space ship trying to break upwards through the upper atmosphere of a planet. Once into the sky, gravity will do its darndest to pull the ship back down, but once the ship breaks free and into orbit, it takes almost no fuel or propulsion to keep moving. In other words, this 200 day moving average may have a tough time letting go of the current and recent upward gold price momentum, but once it does, it's home free until the next 'atmospheric disturbance' at the 50 day moving average and THEN the $1,716 resistance level.

Both the MACD and the RSI are indeed confirming that prices are oversold and need to keep moving up - the MACD more so than the RSI. Within the MACD window, we see that the MACD line has just begun to cross upwards through the red signal line while both lines are still in oversold territory, indicating much more room for bullish behavior. The RSI, on the other hand, has already reached the 50 level, but still allows for some upside movement before reaching the 60 to 70 range.

All in all, the technicals are definitely voting for a continuing path upwards for gold, and so I say again in this article, that fundamentals will be key.

Speaking about fundamentals, let's take a quick look at the U.S. This week we have several U.S. news items that can greatly affect American financial sentiment and, hence, the dollar. Today we have a Consumer Confidence release and Bernanke speaking shortly after. Tomorrow we have the monthly Core Durable Goods Orders reporting in and then Thursday we have the eagerly-awaited Unemployment Claims that is also soon followed by another Bernanke speech.

These five news items, of which there is more weight on the unemployment claims, will all work together to greatly affect the dollar, which will in turn greatly affect gold prices this week. Let's look into each of these items briefly so you can understand what they are and stop yawning.

Consumer Confidence measures exactly what it sounds like and is measured by a poll done via mail of around 5,000 households - of which only about 3,500 usually respond. Respondents are asked 5 major questions pertaining to 5 major areas of their lives:

-current business conditions

-business conditions six months hence

-current employment conditions

-employment conditions in the next six months

-their own total family income in the next six months

The higher the number released, the better consumer confidence is presumed to be. Of course 3,500 responses may not seem like much but keep in mind that these are random, and per basic laws of statistical analysis that I will not get into right now, let's just say it is a pretty safe sample size. The key to knowing how each of these news items will affect the dollar is not as simple as "if it is higher than last month, quarter or year, then the dollar goes up." There's just ONE more complicated step and then you're home free. The actual key lies in what analysts are estimating this number to be VERSUS the actual released number - and by the way, this applies to all news items that report any kind of number, percentage, etc. Here, we have a previous figure of 70.8 and analysts predicting it will be 70.3 this time around. Of course once the analyst estimate gets released, there usually is already an acute or minor reaction in the dollar. Here we have a drop, which is actually bad for the dollar and hence good for gold. It may have already contributed to gold's rise thus far too. BUT, if the actual report releases something like, say for example 70.2, which is even lower than expected, we could start seeing some major price action, which in collaboration with the previously mentioned technicals, can launch gold even higher.

Next up I mentioned Core Durable Goods Orders. This number is usually a percentage representing the amount of CHANGE in orders for durable goods on a month to month basis. Core durable goods are goods that don't wear out quickly or have a lifespan of over 3 years. Examples of such items include computer equipment, industrial machinery, trains, planes, automobiles, etc. Transportation equipment is usually taken out of the picture since they can skew the percentage with major spikes due to their high value (like aircraft). Last month saw a drop of 3% and tomorrow is 'expected' to show a rise of 1.5%. If you were to look at the statistics so far, you could say that consumer confidence broke even with core durable goods orders and there has been neither support nor resistance for/against the dollar or gold prices.

Unemployment Claims are pretty self-explanatory and are a total number of those filed. The previous figure was 348K and the estimate for this Thursday's release is a tad higher at 351K. Looks like the odds are stacked against the dollar on this measurement. Here's why: If the figure comes out and the estimates were correct at 351K, this is STILL more than the prior figure and the U.S. market can react to that negatively. If the figure comes out worse (higher) than 351K, then the market will react even MORE negatively. If the figure comes out better (lower) than 351K, then it will have to beat that number by 3K in order to improve beyond the last figure of 348K. Funny how much information you can glean from two numbers huh?

Finally, we have Bernanke speaking both today and Thursday and although his words are probably just as strong as an employment or unemployment report, we have to keep in mind that he also 'regurgitates' what those reports have already said. I still wouldn't completely discount what he has to say, however, because we never know what 'new news' he may have hidden up his sleeves...

Also, there was a bit of a 'foreshadow' yesterday. On Monday Bernanke stated in a speech to the National Association for Business Economics, “We cannot yet be sure that the recent pace of improvement in the labor market will be sustained.” He also said that weak demand is the primary factor behind the weak labor market, not structural issues like lack of employment skills in the workforce. Is he setting us up for bad news this Thursday or is he just keeping us on our toes? One can never be too sure with this fellow...

Macquarie recently mentioned that the recent pullback in gold represents a "major buying opportunity," and that prices were likely to hit $2,250 per ounce in 2012. Although this price forecast was a downgrade from their previously forecast high of $2,500 for 2012, I dare say that this is a good agreement from a major research firm supporting our stance on "buying gold when prices are cheap."

So technicals and fundamentals combined, I would say that things look pretty good for gold this week, but I retain the usual amount of uncertainty requisite with any financial observation. I can't give you a crystal ball, but I sure as hell can make you understand how 'psychics' use them!

Remember, technical charts are not maps that pinpoint exactly where prices will be, they are more like archaic GPS devices accurate to within a mile…

- Gerald

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