Gold Prices Approaching A Key Support Area

By Jim Donnelly, Olson Global Markets

Despite weakness in the U. S. Dollar, gold prices have continued to drop with technical oscillators positioned bearishly on the weekly time frame. That being said, a key support area does appear to be within striking distance. A reasonable assessment suggests that a test of two separate trend lines, which intersect at the $152.60 level on the SPDR Gold Shares ETF (GLD), appears to be target of the current selloff.  Although that level represents a 4.8% decline from Friday’s close, it is a reasonable target considering that weekly technical studies are not yet in an oversold condition.

Even though GLD has already made a 12.6% correction from its September 2011 high of $183.51, some observers suggest that long positions in gold remain an overcrowded trade on the margin. In addition, it does appear that the Federal Reserve from a monetary stimulus standpoint has already thrown “the kitchen sink” at the dual goal of reflating prices generally and helping to improve the employment numbers. Thus, the uncertainty remains with the size and specifics of fiscal policy, which is likely to act as a drag on economic growth depending on the degree of its scope. The more restrictive fiscal policy becomes, the more likely downward pressures on precious metals will continue unless, of course, nominal economic growth expands.

In any event, if oversold conditions are present when the $152.60 level is met on GLD, buyers will likely emerge to take advantage of the opportunity.

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