This article is written by Matthew Clark who is the owner of Global Forex Pros.
ABOUT THE AUTHOR: Matthew has been a trader for more than 20 years running FX desks at major banks and retail brokers. He recently started Global Forex Pros as a service for brokers to offer their clients, teaching them to trade in real-time as professional traders learn at banks and institutions, giving the retail trader the confidence to trade and increasing volumes for the broker.
Ahead of the FOMC meeting last week on March 16th, Forex Magnates featured an article ‘’With FOMC Ahead – All Eyes Are on Gold.’’ We highlighted that a turn in the USD maybe imminent and due to the increased murmurs of dollar strength impacting earnings for US corporates and with bubbles in many sectors, the long-term prospects for gold as a protection maybe increasing. And on a technical analysis basis we said, ‘’We can see that we are currently in the 5th wave making new lows for the year. As professional traders, we never try and pick tops and bottoms and trying to buy the low of a wave 5 can be a very messy and expensive exercise, as those who have tried to ‘catch the falling ‘ of the EUR/USD this year have found out at their cost. However, we can see from the MACD that pressure to the downside is warning.’’
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Having tested the 1143 the following day we have since staged a sharp rally, hitting 1192.80 earlier today, and it would appear to us that this fifth wave has finished. This two-week high has been fuelled on speculation that the Federal Reserve will delay raising rates in the US and has increased demand for the precious metal as an alternative investment. Last week, gold rose 2.1 per cent, its highest since January as Fed officials lowered their estimates to where rates will be at the end of 2015 at 0.625% from December’s estimate of 1.125%. Gold has been falling as higher rates generally reduce the allure of the shiny metal which normally only offers returns in price gains to investors.
With higher rates usually associated with assets with better yield prospects such as bonds. Jens Pedersen, an analyst at Danske Bank, said in an interview on Bloomberg, “The market has taken Yellen’s comments as dovish, helping to drive down the dollar and supporting gold.” But what are the prospects for XAU/USD in the coming days or weeks?
We can see from the long-term chart below that last week’s lows appear to have completed the (B) and we should now rally in 5 waves to at least the wave (A) high at $1,307.40 with possibilities as high as $1,426-$1,433. As in last week’s description, the shorter term wave structures and the relative momentum will determine when this gold advance terminates, but we are expecting it to be at least 10 per cent higher from here. If we take into account that last week net longs in futures and options contracts was in line with previous gold lows over the last decade, then we have greater confidence that at least for now a low is in place.
We can see from the shorter time frame chart from the lows last week that we have completed wave (V) on what would be the first minute wave higher. Bearing in mind the triple divergence on the MACD, we should look for pull back to enter longs in the XAU/USD around 1170/80 with a stop loss below 1140 for a longer term trade to way above 1,300 and possibly more.