Countervailing forces in the world financial scene kept the price of gold in a large, meandering range for yet another week. After testing both sides of the recent range, gold is now poised near the middle ground at $1,640 per ounce awaiting direction from the broader markets.
Deepening concern over the European debt crisis has put massive downside pressure on equities markets amidst speculation that deleveraging and a reduction of risk will send both Europe and the US back into a recession. This pressure has taken a significant toll on the commodities complex, with precious metals falling in sympathy. Fear of across-the-board price declines has combined with large fund liquidations and redemptions in gold futures and ETF's, driving the price $300 lower from the all-time highs above $1,900 per ounce.
With that bearish backdrop entrenched in the near term, long term fears of central bank bailouts through further quantitative easing and new deficit funded stimulus programs are underpinning long term support for gold. As has been witnessed since the 2008 crisis, expanding the money supply has been hugely beneficial for the price of metals.
The resulting ebb and flow from these pressures is clearly represented on the charts in the form of the Triangle chart pattern shown here on the hourly time frame. Short term liquidation is triggering the downdrafts to the support trend line just below $1,600 per ounce, which appears to be seen as a value area for longer term bullish investors. As selling pressure enters the market, buyers are quickly taking advantage of the dips to accumulate more at lower prices and driving the price upwards in the process.
While it remains to be seen which of these forces will gain the upper hand, both support and resistance levels are now clearly defined for the week ahead. Should the outlook turn favorable for further upside gains, gold will need to move above the top of the triangle at $1,670 per ounce to trigger an upside breakout. More deterioration in equities and commodities will likewise drive the market back to a test of the $1,600 per ounce level. A drop substantially below there would set the stage for a retest of the major support at $1,550 once again.
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