After Short-Covering Rally, Buy Gold 'On a Dip' Traders Advised

Author: Paul Ploumis
25 Mar 2015 Last updated at 01:05:08 GMT

EDGWARE (Scrap Monster): Buy Gold bids eased back in London trade Tuesday lunchtime, pulling spot prices down from a new 2-week high after US consumer price data beat forecasts of negative inflation.

Last month's headline CPI showed 0.0% growth from February 2014.

So-called 'core' CPI – with food and fuel excluded – rose 1.7% annually, just ahead of the Wall Street consensus.

Separate PMI data from HSBC/Markit earlier said China's manufacturing sector shrank again this month after stabilizing in February.

The US Dollar rallied from new 2-week lows on the FX market, knocking the Euro back from $1.10 and edging prices to buy gold down $7 per ounce from $1195.

"Short-covering was a key motivator behind [last week's] rally," says a note from the Hong Kong team at Japanese trading house Mitsui Precious Metals.

"With resurgent commodity markets," agrees David Govett in London for brokers Marex Spectron, "the reason is straightforward – short covering," with bearish traders forced to buy gold contracts to close their short positions at a loss.

But following last week's jump in gold prices from near 5-year lows, "So far we have seen no pick up in futures volume above $1180 per ounce," cautions a note from Danish bank and spread-betting bookmakers Saxo Group.

"[This] could indicate that most tactical stops have already been taken out."

Besides last week's short covering, however, prices to buy gold rose on "a reversal in the US Dollar," says Jonathan Butler at Japanese conglomerate Mitsubishi.

"With a little further to run [in that pullback], gold's uptrend could be sustained."

Euro gold prices rose Tuesday to €1090 per ounce, just shy of last week's finishing level.

British savers wanting to buy gold earlier saw the price in Sterling briefly pop above £800 per ounce for the first time in 5 weeks after UK inflation slowed to 0% from a year ago on official data.

"Gold has stabilised above the support zone of $1150," says the latest technical chart analysis from French investment bank and London bullion market maker Societe Generale.

"An extended recovery looks more plausible," it goes on, pointing to $1198 "and even $1223" over the next 1-3 months.

"It's time to buy a dip," agrees Bank of America Merrill Lynch's short-term trading team, advising an order to buy gold on a drop below $1175 – last seen at the start of US trade Friday.

"Pullbacks should not exceed the March 17 low at $1143," BAML adds, setting targets at $1307 and then $1345 per ounce.

Courtesy: www.bullionvault.com