Jun 20, 2011

Gold Near Peak?

Gold is showing signs of slowing its price growth in recent weeks. Does it have room for future gains or it’s time for healthy correction?
The method used in the analysis is Fibonacci retracement applied for the previous correction in order to determine key support, resistance levels and turning points. Gold has proved to be technically predictive but one should consider fundamental factors as well.
Measuring the corrective wave with Fibonacci retracement gives 1x and 2x projections of the important 61.8% level also known as the golden ratio in the nature. Those 161.8% and 261.8% levels determine possible resistance levels of the future move.
gold_fibonacci
Gold Price Projection Using Fibonacci Ratio
Chart source: Saxotrader, Chart analysis: investink.net
In 2008 gold started correction before the markets feel the destructive effect of Lehman collapse. The peak that year was 261.8% positive move from the bottom of the 2006 negative correction, seen on the chart. 161.8% level appeared to be resistance but significant correction did not occur at that time.
gold_fibonacci1
Gold close to Important resistance Level
Chart source: Saxotrader, Chart analysis: investink.net
2008 correction determine recent move. Now we are close to 261.8% line that suggest strong resistance. If the pattern is correct we should now be close to the peak of recent gold cycle. This is the case only if fundamental factors support such a move. Current economic environment is not the same as that in 2008. At the end of QE2 and cheap money, gold is poised to correct with rising dollar. This would not happen if economic situation force central bankers to continue with quantitive easing – in case that economic recovery is still more fragile than expected. Slowing US and world growth would prevent gold from decline because the markets would calculate eventual QE3 or additional stimulus in other form. Pumping liquidity means pressure for the dollar, cheap dollar means expensive gold. All this is connected with safe heaven perception of the precious metal. So correction would be limited to the downside if not horizontal as it appeared to be at 2010 end.

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