Away from our regular stock market analysis last week, we shall indulge in a comprehensive technical analysis of a different asset class an asset that has stood the test of time and has a unique store value for reasons of scarcity, indestructibility and portability.

This asset has served various ends over centuries such as being an international medium of exchange, a repository of wealth and a strong base for major currencies of the world.

Yes! It is the shining and glittering precious metal, gold. In the following paragraphs we have analysed gold both from a long as well as short to medium term perspective.

Strong support and resistance levels that are normally used as buying and selling points by the analysts are also given from the point of view of investors as well as traders.

Stop-loss levels, used for risk management and protection of capital in case of an adverse movement of price, have also been given.

Let us look back at some vital historic facts regarding the movement of gold prices. It hit a high of $875 in January 1980. The prices hit an all time low of $252.50 in August 1999 almost 19 years later.

Whereas the major cycle of gold continued to be downwards since 1980, there were intermittent up trends in between during 1983, 1987, 1989, 1993 and 1996. But these rallies failed to reverse the long-term downward cycle.

Coming to more recent trends, gold has regained a lot of its glitter in the last three of four years.

After having touched a low of $252.50, it rallied back to $327.50 in October 1999. It fell back again to $255 during February and April 2001.

It is during this time that many fundamental factors favouring gold made it look attractive for investment. Besides being long neglected, gold was considered grossly undervalued by financial analysts.

Besides, there were some major concerns related to the US economy such as a falling stock market, a huge amount of consumer debt, massive trade deficits and a falling dollar.

Gold, therefore, emerged as a strong investment candidate. Investment gurus and financial experts advocated the presence of gold within a range of 5-15 per cent of total assets for a stable and balanced portfolio. The sudden shift of attention towards gold and the consequent rise in demand started a new up trend in the price of the yellow metal. From a low of $255 in April 2001, gold started a new upward cycle, which remains intact till date.

It touched a peak of $428.20 in January this year the highest since 1989 gaining almost 68 per cent in less than three years. The prices lost ground thereafter and it touched a low of $392.50 in the previous week.

Fundamentally speaking, some of the concerns of 2001, that had made out a strong case in favour of investment in gold, do still persist. Yet the prices are currently falling. So where are the prices headed? Is the bullish trend intact? What are the long-term prospects? Where is the current fall likely to stop? What levels could provide a low risk entry? Here is a technical assessment.

The metal is currently undergoing a consolidation/correction phase. The short as well as the intermediate trend is down. It may be expected to either move sideways within a range of $25-$30 or go down further in the weeks ahead. Considering various technical factors, $387-$389 levels are likely to be strong support from which a bounce back could be expected. In the event of entry at such levels, a stop-loss around $386 is desirable. Any upward rally is likely to face resistance at $407-$408 and thereafter $415-$416 levels.

Resistance levels are normally used to book profits or exit longs because a fall from such levels is a strong probability. Looking at the price behaviour since April, 2001, gold has not lost continuously beyond two months.

If this trend is to continue, next month could see the resumption of the up trend since the metal has already fallen for two months i.e. January and February this year.

Long-term picture

The long-term trend remains strongly bullish. The various technical indicators such as the price patterns, moving averages and oscillators continue to indicate so. Medium term and short-term corrections (like the ones being seen currently) not only help the commodity in regaining strength but also present a buying opportunity to investors.

If the fall is beyond $387-$389, the next support levels will be around $375-$377, followed by $360-$362.

For capital protection, any long position taken at any levels should be guarded with a stop-loss of not more than five per cent below the entry level. A cross over of $416 on the other hand will throw up the initial signal for the resumption of the medium as well as long term up trend.

On the basis of various technical parameters, the metal has the potential to touch $453-$54 levels, once it crosses the earlier peak of $428-$420.

In case the long-term cycle remains intact, the price targets $490-$495 and thereafter $563-$565 do not look impossible in the months ahead.

Conclusion:
The precious metal is in a strong long-term up trend. The short to medium term trend is however down as of now. Looking at the expected risk/reward ratio, gold currently appears to be a good investment opportunity.

The author is a technical analyst and works with N.R. Doshi Group.

Disclaimer: The article is based on technical analysis a method that uses the current and historical price and volume data for forecasting future price moves. Like any other method of forecasting it can go wrong. Neither the newspaper nor the author undertakes any liability monetary or otherwise for any decision based on the above.

By Vivek Mahajan

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