Dissector: Will gold continue to dazzle?

The strife over the US debt ceiling and concern about the health of European economies has sent the dollar reeling against most currencies. This wave of risk aversion has however been favourable to gold and the yellow metal recently scaled the $1,600 per ounce level. This is an apt juncture to review the outlook for gold and its counter-part, silver.

Long-term view

In our edition dated October 31, 2010, we had analysed the long-term outlook for gold wherein we had written that after moving between $250 and $450 for two decades from 1985, gold had broken out in 2005. Our long-term view remains unaltered. We stay with the view that the third leg of the structural up-move from April 2001 is currently in progress with the targets of $1,867 and $2,587.

These are of course long-term targets and the metal can take a couple of years or even more to get there. The 2008 peak at $1,030 remains the critical long-term trend decider for this metal.

Intermediate-term view

Gold continues to rally higher with very shallow corrections, making labelling of the move from October 2008 quite difficult. The minor C of this wave-group appears to be extending and there are multiple ways in which this move can be counted. But there are a cluster of wave targets between $1,630 and $1,700 making it quite likely that the uptrend can halt around this zone.

If that happens, that will not spell the end of the rally but a correction can ensue for few months in the zone between $1,500 and $1,700. This consolidation can be followed by yet another attempt to move on to new highs. The zone around $1,500 is likely to serve as a good medium-term support.

Short-term outlook

Short-term trend in gold is up since the July 4 trough at $1,485.7. This uptrend is however halting over the last four sessions as the metal moved in a narrow range between $1,600 and $1,630.

Short-term targets if the metal manages to hold above $1,600 are $1,685 and $1,739. Short-term supports are at $1,582 and $1,573. Short-term view will turn negative only on close below $1,540.

Silver

The breath-taking rally in silver between February and April this year took the metal from the low of $26.4 per ounce to $49.79. There was an equally dramatic crash in May that dragged it down to $32.3. Silver is currently attempting to stabilise above the $34 mark despite brief incursions below it in May and then in July.

Continued strength above $34 is positive from a long-term perspective since it occurs at 38.2 per cent retracement of the up-move from October 2008 to April this year. The metal can then be expected to move in the band between $34 and $50 for few more months before moving higher. However, sharp decline below $34 will negate this positive view and pave the way for decline to $29.1 and 24.2.

Key medium-term resistances are at $41 and $43. Investors with short to medium-term perspective can cash out if the metal reverses lower from either of these levels.

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