HardAssetsInvestor

Written by Sumit Roy  |

December 20, 2011

Precious Metals Monitor: Gold At $1600, Time To Buy?

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Gold successfully tests a key support area. We examine the short-term outlook for prices.

Though gold is rebounding today, this past week was a negative one for the metal overall as prices fell as low as $1561 on Dec. 15 in a continuation of a slide that began in early November. Gold was last trading just above the $1600 level.

Source: Bloomberg

Is now the time to buy? We’ve written extensively about gold’s technical support level near $1600, as well as support near $1532, which is the intraday low struck on Sept. 26.

This past week’s low of $1561 was roughly in the middle of those two levels. The initial bounceback is encouraging for bulls, since it suggests that prices are finding support near these key technical levels.

But that doesn’t necessarily mean that the immediate downtrend is now over. With little in the way of catalysts to send prices higher, it is unlikely that prices will “run away to the upside” from here.

Currently, the driver of gold is the U.S. dollar. The correlation between the yellow metal and the U.S. Dollar Index has been -0.95 over the past month and -0.96 over the past two weeks. In other words, gold has been falling when the dollar rises, while the yellow metal has been rising when the dollar falls.

The U.S. Dollar Index was last trading at 79.81 — off modestly from last Wednesday’s 11-month high at 80.73, but still up significantly over the past month.

The pullback in the U.S. dollar looks like a correction within the recent uptrend. Because gold and the currency have been tied at the hip, it is reasonable to assume that gold’s latest bounceback above $1600 is merely a correction in its recent downtrend.

Whether gold ultimately falls further from here remains to be seen, but given the evidence, it is prudent to wait and see if gold ultimately is able to hold onto the $1532-$1600 support.

A breakdown would likely lead to a surge of technical selling, with potential for much lower prices below $1500, and even close to $1300.

Given the significant downside risk and the limited upside in the short term, we remain on the sidelines for now.