Saturday, January 1, 2011

Gold to Face Choppy Price Action as Liquidity Remains Low

http://www.dailyfx.com/forex/fundamental/forecast/weekly/chf/2010/12/24/Gold_to_Face_Choppy_Price_Action_as_Liquidity_Remains_Low_.html
Gold_to_Face_Choppy_Price_Action_as_Liquidity_Remains_Low__body_TOF1224GOLD.jpg, Gold to Face Choppy Price Action as Liquidity Remains Low
Gold to Face Choppy Price Action as Liquidity Remains Low
Fundamental Forecast for Gold: Neutral
Gold pushed higher last week as debt contagion fears in the Euro-Zone continue to rattle markets, while tensions in Korea remain in the spotlight. As uncertainty in the global economy lingers, market participants should not rule out additional gains in the yellow metal as traders purchase the commodity for protection against the recent fundamental developments. Indeed, many strategists have been calling for a correction in gold; however, so long as price action remains supported by the 50-day, traders may witness the metal inch higher this week as the economic docket will be fairly muted.
This past week, gold faced whipsaw price action as many traders were offline ahead of the Christmas holiday. The unclear direction may spillover into next week's trade due to the New Year's Holiday. However, developments in the 16 member euro area may dictate price action as fears surrounding debt contagion in bloc drift. This past week, there was lot of activity by credit rating agencies. Fitch slashed Portugal to A+ from AA- and placed Greece's long term issuer default on review for a downgrade. Meanwhile, Moody's Investor Services announced that Portugal's credit rating is on review for a possible downgrade. Looking ahead, the debt crisis in the bloc looks poised to derail the euro next year as the 16 member euro area struggles to achieve a self-sustaining recovery. If the crisis in the bloc worsens and either Portugal or Spain hints at tapping into the EU-IMF life-line, which seems likely as of late, gold will continue to push higher.
Meanwhile, tensions in Korea should be overlooked. Last week, North Korea warned that it would retaliate if South Korea proceeds with a live firing drill on the west coast sea border. Surprisingly, South Korea went ahead with their drills and North Korea did not respond. Traders should not rule out an end to the tensions in the region as North Korea warned on Thursday that it was prepared to wage a nuclear "sacred war" on South Korea, while adding that the country could engage in conflict "at any time." The developments in Korea are worth noting due to the fact that if a war arises, gold will benefit on the back of a flight to safety.
There will be little event risks next week that could largely influence gold prices. Worth noting are U.S. consumer confidence, Euro-Zone M3 money supply, and U.K. nationwide house prices. Taking a look at price action, downside risks in gold remain capped by the 50-day moving average which has provided support for the precious metal since August 11th. So long as the commodity remains above this moving average, upside risks remain. Indeed, gold has worked its way into a triangle formation, and a breakout may be in the horizon. Rather than anticipate the move, traders should await confirmation, which may come to the downside as the MACD is displaying beginning signs of a crossover to the downside. All in all, remain on the sidelines for further developments in the global economy and avoid choppy price action amid the Christmas and New Year holidays. -MW
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