Gold will trade in a range, consolidating around current levels, before marching towards higher targets, technical analysts said on Wednesday. Chartists, who predict future price movements based on past market performance, say technical parameters are crucial for anyone making important trading decisions.
Recent sell-offs damaged gold's uptrend, but long-term sentiment is bullish, they added. "Gold has been in a rectangular reconsolidation pattern since last summer, with $700 an ounce on the upside and $575-$580 on the downside," independent technical analyst Cliff Green said, referring to gold futures prices in New York. "It's obviously the preparation for a next big move, but I don't think a breakout is imminent. We do need to break above $700 to confirm that this lengthy sideways activity is complete and we are starting to resume that longer term upward move."
Gold futures for April delivery on the COMEX division of the New York Mercantile Exchange settled down $1.40 at $662.50 an ounce on Tuesday. Spot gold hit a 4-week high of $669.50 on Wednesday and was at $668.10/668.60 by 1239 GMT.
Spot gold rallied to a nine-month high of $689 on February 26 on tensions between the United Nations and Iran over the country's nuclear ambitions, but retreated to a six-week low of $632.30 on March 6 as investors took profits.
Analysts said there was a direct relationship between sideways moves and the gold price, with a longer consolidation phase often resulting in a potentially bigger price movement. Since gold had been broadly in a consolidation pattern for several months, it gave a huge platform for a price rally. "Short term, the prospect is generally for a little bit more range-trading," Phil Roberts, analyst at Barclays Capital, said.
"Long term, I think it's going higher. The uptrend has done nothing wrong and we are going to substantially higher levels for gold later this year." Analysts said an area between $670 and $675 was crucial in the short run, while a break of the level might lift gold towards $700. But a drop to $640 could drag prices to around $635.
"What you have got is a market which is essentially consolidating just below resistance. Once you get above $667, your next upside target is going to be $677 and $690-$691," Karen Jones, technical analyst at Commerzbank, said.
Though the market looks at important technical levels for direction, some people question the methodology of predicting future actions based on past trends, saying the two time periods are independent and one cannot influence the other.
But technical analysts do not buy the argument. "The reason why chart patterns repeat themselves is because human nature is behind the decision making process of buying and selling and it's that human nature that repeats itself," J.P. Morgan analyst Robin Wilkin said.
"By definition, we are a creature of repetition." Popular technical patterns like Double Top and Head and Shoulders become self-fulfilling at times as some people trade that pattern itself rather than fundamentals, chartists said.
Traders follow different parameters. A trend follower might look at moving averages and price breakouts, while some others might use momentum studies and Elliott waves, they said.
A lot of chartists do similar jobs, but they combine them in different ways to help them with what they try to achieve, analysts said, adding the subject often involved analysing a couple of hundred mechanical studies.