Gold consolidates as dollar and commodities fall

Gold is consolidating in a narrow range between $1300 and $1350/ounce. Penetration of the descending trendline indicates that a bottom is forming. Reversal below $1300 would suggest another test of primary support at $1200, but breakout above $1350 is as likely and would target $1400.

A rally to $1400 would test the long-term descending trendline as shown on the monthly chart.

Spot silver has made a weaker rally over the last month and breakout below the rising flag would warn of another decline, with a target of $16.50*. Declining silver would be a bearish sign for gold.

* Target calculation: 19.5 – ( 21.5 – 18.5 ) = 16.5

Dollar Index

The Dollar Index found short-term support at 81.50. Penetration would indicate a test of primary support at 80.50. Recovery above 82.50 is unlikely, but would suggest the correction is over. Another 13-week Twiggs Momentum trough above zero would indicate the primary up-trend is intact. Breakout above 84.50 is some way off, but would signal an advance to the 2009/2010 highs around 90.00.

* Target calculation: 84 + ( 84 – 79 ) = 89

Crude Oil

Nymex WTI light crude is retracing after a sharp rally and is likely to find support between $98 and $100/barrel. Expect the spread with Brent crude to narrow as the US recovery outstrips Europe.

* Target calculation: 98 + ( 98 – 86 ) = 110

Commodities

Copper is testing long-term support at $6800/ton. Follow-through below $6700 would confirm another primary decline.

Commodity prices are primarily driven by Chinese demand. With the Shanghai Composite Index testing its 2012 low (1950), breakout would signal a decline to its 2008 low (1660) and drag commodity prices lower. Dow Jones-UBS Commodity Index breach of long-term support at 125/126 would confirm, targeting its 2009 low at 100*. Not good news for Australian resources stocks, even if the impact is cushioned by a falling Aussie Dollar.

* Target calculation: 125 – ( 150 – 125 ) = 100