Gold rally hinges on US 2nd quantitative easing

Gold for December delivery recovered 2.62 per cent last week to settle at $1.359.80 an ounce on Friday. Gold futures rose on speculation that the US Federal Reserve will increase debt purchases, thus weakening the dollar and boosting the metal’s appeal as an alternative investment.

Gold is up 3.7 per cent this month, while the dollar has lost 1.9 per cent against a basket of six major currencies on bets that policy makers, meeting on November 2-3, will announce another round of so-called quantitative easing (QE2) to bolster the economy.

The market picture for the last two trading sessions (Thursday & Friday) hints at a price level of $1,372.50 for the gold December futures based on time-priced opportunities (TPOs). Some volume-based resistance is expected to come around $1,361.50. On the weekly market picture chart, gold is expected to get support around $1,318.50.

The December futures closed at the highest level on Friday with 25 per cent volume changing hands above the value area. The undercurrent was significantly bullish on Friday with 70 per cent volume staying above the day’s high.

The 21-day moving average (DMA) data indicates resistance for gold at $1,379 and strong support at $1,325. Options traders bought $1,350 put options, paying a $30-premium on expectation of a significant rally in gold after the US Fed’s meeting. Traders also sold $1,350 put options on expectation of a limited downside from the current level.

On the Multi Commodity Exchange, gold futures for December delivery are expected to move up to around Rs 20,000 per 10 grams with strong volume-based support at Rs 19,250.

Going ahead, gold may fluctuate in a narrow range till the outcome of the US Federal Reserve policy makers’ meet on November 2 is not known. “The market is anticipating and pricing in another round of easing,” said Frank McGhee, the head dealer at Integrated Brokerage Services in Chicago. “What stops the rally is if the US Fed just talks. There has to be some tangible evidence the US Fed is in the market buying back bonds to underpin the rally.”

Gold prices could still rally if insufficient quantitative easing measures simply introduced new downside risks to US growth.