Friday, October 18, 2013

Do not be fooled: the downtrend in gold is intact

At the time of this writing, 08:00 GMT, the downtrend in Gold is intact. This is despite a pronounced run-up in all geographical markets yesterday as a response to the announcement that the US Congress passed a bill that allows for government re-opening and the avoidance of default.

The thinking here among market participants seems to be that the non-permanent nature of the accommodation that has been reached, between Democrats and Republicans, will result in this impasse arising again, early next year. This fact, combined with the expected appointment of Ms. Janet Yellen, a well known proponent of monetary easing, as the new head of the Federal Reserve in place of Mr. Ben Bernanke, raises the expectation that the much vaunted tapering of Quantitative Easing (QE) in the US is still some way off. An end to QE has been widely acknowledged to be bad for the price of gold, so any postponement must be good for it.

But the chart, nevertheless, tells us that gold investors are still taking the long view, and are reducing the price of the precious metal. Lower highs and lower lows on the daily chart, combined with a falling 200 day Simple Moving Average (SMA), and the fact that price is currently underneath that same 200 SMA , all tell us that this is the case. It may change, particularly in the short term, but the facts outlined here illustrate well the reason why it is important to take all developments, and in particular price action, in their proper context when trading Foreign Exchange.

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