The key to the gold rise will be the dollar/euro arbitrage. Globally, gold trades inversely to that of the US dollar. What this means is that when the dollar trades up, gold usually trades down. And conversely, when the dollar trades down, gold trades up.
Recently, we have seen a crack in the US dollar index. It had support at 87. However, 87 was taken out over the past week.
The next level support for the US dollar is 84 (the lows of earlier this year), then after that 80. The current and coming weakness in the US dollar is a major reason why gold should continue to increase in price.
However, gold possesses major resistance in the $420-430 an ounce range. On no less than five occasions in the past 15 years, the yellow metal has traded up to the $420-430 range and then failed at this level.
Therefore, the $430 represents a lot of resistance and is going to be difficult to breach. Gold touched the $430 an ounce level last Monday. Gold has pulled back since then and it is likely to be so over the short term.
However, once gold breaches the $430 level there would be no looking back.
Analysts are of the view that the $420-430 an ounce level is to gold what the $40-42 a barrel level is to crude oil. Crude oil prices bounced off $40 a barrel numerous times over the past 14 years but once the oil prices breached it, it rose all the way to $55 a barrel.
The writer is director, BullionIndia Infoservices and Consultancy