Although the US Federal Reserve has maintained its stance on tapering its monthly purchases of bonds and mortgage backed securities to the extent of $10 billion a month, the “fear trade” has been providing upside to gold prices despite the sucking out of cheap liquidity out of the financial system.
There have been several reasons behind the bullish price performance of gold in 2014. These include poor economic data out of the US, which has been dampened by the severe winter and affected the manufacturing activity and the first-ever corporate bond default and ongoing fears of a “hard landing” in the Chinese economy. Also contributing to it more recently is the systemic financial risk arising out of the geopolitical tensions in Ukraine.
But at current levels, the charts are now painting a gloomy picture for the yellow metal in the short term. Looking at the weekly candlestick charts of gold, one sees that gold prices have pierced through the upper Bollinger band. This is usually a sell indicator.
Bollinger bands represent a chart overlay that shows the upper and lower limits of “normal” price movements based on the standard deviation of prices. Further, two momentum-based indicators — the relative strength index (RSI) and what is called the Williams %R — are both pointing towards a sell signal in gold.
Both these indicators suggest that gold is currently trading at overbought levels. The RSI is currently 62. Readings close to the level of 70 usually indicate overbought levels and call for an initiation of a short position. The Williams %R oscillator, which is measured on a negative scale of 0 to -100, currently stands at -10. Readings above -20 are usually associated with overbought conditions.
Besides the above mentioned technical factors, the US data scheduled for release in the coming weeks are for months, which were not affected by the adverse weather conditions. Thus, one expects a positive uptick in manufacturing activity and expect the US dollar to move higher against other foreign currency majors.
The worst of the Ukraine crisis is also, perhaps, behind us, as confirmed by the Euro surging towards the 1.4 level against the US dollar. Thus, even on the macro front, no immediate catalysts are seen to sustain the price momentum in the precious metal.
What appears prudent for medium-term traders is a short position in gold with a stop loss of around $1,400 per ounce and a target of $1,320 per ounce.