gold decline - time to buy???

Gold Posts Largest Decline Since September - Is It Time To Buy?

DailyFX provides forex news on the economic reports and political events that influence the currency market.
By Michael Boutros, Currency Analyst
19 November 2011 01:22 GMT

Fundamental Forecast for Gold: Bullish

Gold tumbled by more than 3.6% this week posting its largest weekly decline since late September as a stronger dollar and falling expectations for further easing from the Fed weighed on demand for the precious metal. Over the past few weeks gold has failed to act as a “haven” amid growing uncertainty regarding the ongoing debt crisis in Europe. Instead the metal has continued to track equity markets with the gold / S&P correlation flipping to positive since the start of the November. Prior to that, gold had maintained an inverse relation with overall risk trends since early July when inflation concerns and dollar diluting policies from the Federal reserve saw traders flock into bullion as a hedge against the threat of inflation.

Looking ahead, gold traders will be closely eyeing the release of the FOMC minutes from the November 2nd policy meeting for insight into future policy shifts from the Federal Reserve. Throughout the course of this week comments from various central bankers have suggested that there continues to be dissention among voting members with regards to what measures, if any, the Fed should implement to combat the 9.0% unemployment rate which remains stubbornly high nearly two years after the worst financial crisis since the Great Depression.

In a speech before the Texas Tech Alumni Association this week, Dallas Fed President Richard Fisher cited, “I am looking forward to the day I can advocate tightening monetary policy.” A known hawk, Fisher went on to note that inflationary pressures do not seem to be a threat at this point with expectations for inflation to ease back towards the Fed’s informal target of around 2%. However his views conflict with remarks made by other voting members with New York Fed President William Dudley stating that there is more the central bank could do to provide more stability to financial markets such as the resumption of asset purchases as well as providing more clear guidance on the duration interest rates are expected to remain at record lows. His comments echo that of Fed Chairman Ben Bernanke who noted that further quantitative easing “remains on the table.”

Should the minutes show a growing rift within the Fed, gold may find strong support as traders look to shield themselves from the threat of inflation if the central bank once again turns on the printing press to provide further liquidity to markets. And although increased speculation in the precious metal may have contributed to the recent surge in volatility, ongoing fears about debt contagion in Europe is likely to see investors seek safety in bullion as yields on sovereign debt around the region continue to climb.

From a technical standpoint, gold continues to hold within the confines of an ascending channel formation dating back to the September lows with prices closing the week just above interim resistance at $1720 after breaking below $1740 on Thursday when the yellow metal plummeted more than 2.5%. A break here eyes key support at the 76.4% Fibonacci extension taken from the August 25th and September 26th troughs at $1700. This level remains paramount for the precious metal and if compromised exposes moves down to $1685 and the 61.8% extension at $1665. Notwithstanding a break below channel support, our medium-to-long term bias remains bullish with topside resistance now eyed at the 100% extension at $1750 backed by $1775 and the key psychological level at $1800. Look for gold to take cues off Tuesday’s Fed minutes where traders will gauge the possibility of further quantitative easing measures from the central bank. – MB