Gold Technicals – No demand despite BOJ’s inflation risks

BOJ announced yesterday that they are committed to buy more Japanese Government Bonds (JGBs). How committed? Well, how about a 7 Trillion Yen (72 billion USD) per month commitment? Not good enough? How about BOJ is so committed to buy JGBs that they have broken their own rule – temporarily suspending the pesky “Banknote Rule” which has been preventing them from buying JGBs beyond 3 year maturity. Market is certainly impressed with this BOJ’s announcement. 10Y JGB gapped lower on today’s open, and set record low of 0.325%. Price went so low that Tokyo exchange has to step in after midday break to halt trading in JGB futures for the rest of the day, only allowing profit taking actions.

When the US Fed announced QE1 and QE2, Gold prices rose as traders scrambled to buy gold seeking inflation protection. However QE3 has failed to push Gold prices higher, due to a combination of a speculators front-running Fed’s QE3 announcement, and also the fact that neither QE1 nor 2 really resulted in hyperinflation in US. Hence it is no surprise that Gold prices did not react positively to Japanese’s version of QE. Traders are no longer afraid that such Central Bank actions may result in future hyperinflation risks, after seeing so many Central Banks pumping in liquidity into the economy for the past few years.

Daily Chart

Instead of rallying, Gold price actually went down, due to the USD component strengthening from USD/JPY’s rally. Price has broken below Feb lows, and is currently resting above Channel floor. Stochastic readings suggest that a trough may be forming soon, which will help enhance the likelihood of a bullish bounce towards Channel Top. However, in order to do that, price need to clear numerous resistances, with Channel Top currently above Mar ceiling and even higher than Jan’s low. Price would stand a better chance testing the ceiling further down the road when the Top line hits below 1,615 and preferably below 1,600.

XAU/JPY Daily Chart

Things are also not looking bullish even when Gold is priced in Yen. Despite Yen’s tremendous weakening, gold prices wasn’t able to break the interim resistance, and is currently trading back towards the Channel floor.

XAU/SGD Daily Chart

If we use SGD (chosen due to its relative stability) to price Gold, the same downtrend is observable. The good news for bulls is that prices have bounced off the descending Channel floor, a common theme across Gold priced in major currencies (except Yen of course). Stochastic readings also suggest that price could be entering a bullish pullback. Nonetheless, no matter how you cut it, the overall trend is down for Gold, and price is running out of fundamental reasons for people to buy it. Cyprus did not trigger a bull run, and neither did BOJ. With fear index VIX heading lower, it seems that traders are getting less fearful about the market, and the complacency will allow Gold bears to roam freely. With that in mind, even if a terrible NFP print tonight may only provide short-term bounce higher, but that may be enough to push price towards Channel top across different currency but unlikely to change longer-term sentiment.

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