Gold prices have been all over the chart and moving in a sideways consolidation channel since late September, caught between $1,800 at the top end and $1,550 at the bottom end.
After a recent move towards $1,800 in late February, the metal topped, and it is again struggling to hold ground at around $1,650 with key support at $1,600 to $1,625.
Gold had been on a four-day winning streak, but the June Gold remains below its 200-day moving average (MA) of $1,702 and 50-day MA of $1,680. There is a bearish death cross on the chart, so there could be more weakness.
Failure to rally to the 50-day MA could see a subsequent move down towards $1,600, which I would view as a decent buying opportunity to buy or add to a position. Moreover, a further decline to $1,550 would represent an excellent buying opportunity for the metal.
The reality is that the price of gold is currently driven by two key variables—global risk and world demand. I feel both factors are supportive of higher prices.
I feel there will be tough years ahead for the European Union and eurozone, along with the debt mess here. Spain is in its second recession and in trouble. Read my thoughts in Don’t Jump on the European Bandwagon Yet.
China continues to stall, with the first-quarter gross domestic product (GDP) at 8.1%, below the 8.3% to 8.5% estimates, and the lowest reading in 11 quarters.
In the Middle East, there are mounting issues in Syria and speculation that Iran is close to having the knowledge to develop nuclear weapons.
The second major variable that could drive gold higher is the higher demand from China and India. China is expected to jump ahead of India as the top consumer of the yellow metal in 2012. China’s demand for gold is estimated to surge 20% this year, according to the World Gold Council. This demand has helped to drive up prices and will continue. Moreover, there are thoughts that China wants to reduce its buying of U.S. debt and instead accumulate physical gold. Should this happen, it would give a major push for prices.
Staying in the Asiatic region, I also expect gold to continue to be in high demand in India, a major consumer of the precious metal. Demand in India could be massive and expand at 10% to 15% this year, up from an estimated five to seven percent in 2011. India imported a record 969 tonnes of the yellow metal in 2011, according to the World Gold Council.
Given the current downward pressure, my advice is to buy gold stocks on price weakness, with a break below $1,600 representing a great opportunity to buy.