Is a “Deeper Retracement” or a Rebound Ahead for Gold?

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Gold pares gains after GDP, consumer sentiment
Gold pares gains after GDP, consumer sentiment

COMEX gold futures fell to as low as $1,686 per ounce in late morning trading on Wednesday, just as the U.S. Dollar Index reached its intra-day high of 79.845. However, the price of gold subsequently recouped the large majority of its decline to trade near unchanged at $1,695.50. The rebound coincided with the dollar paring its gains, as well as a broad-based rally in the commodities complex.

Nonetheless, the yellow metal remains lower this week by 1.1%, and over 5.7% below its multi-month high of $1,798.10 per ounce – reached on October 5th. In light of gold’s weakness, several investment banks have updated their outlooks for the yellow metal in recent days.

Strategists at Standard Bank asserted that “It appears that the risk-off sentiment caused by the lack of progress in the U.S. fiscal cliff negotiations is weighing on all asset classes, even the safe-haven precious metals…We believe that the market will find it difficult to sustain upside this week, at least until this Friday’s non-farm payrolls data, unless there are significant developments on the fiscal cliff front (something which appears highly unlikely).”

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Commerzbank weighed in with its technical perspective on gold: “We will retain our bullish view (on gold)… while the November low, 200-day moving average and 50 percent retracement of the May-to-October rise at 1672.50/1661.64 underpins on a daily closing basis. Support above this level can be seen around the 1698.52 late October low.”

BNP Paribas analyst Anne-Laure Tremblay wrote in a note to clients that “While the fundamentals for gold are strong, particularly given the Fed’s accommodative stance, the positive momentum seems to have all but disappeared for the moment.”

Tremblay went on to say that “We continue to expect a rebound from these levels although the odds in favour of a deeper retracement have increased. It could be (due to) just plain investor fatigue, as the gold price has failed to sustain any rally in the past two months.”

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