Gold: Swiss referendum is key

Gold will have to break through the 1266 level to turn it’s corrective rebound into an important shift in sentiment, according to George Davis, Chief FIC Technical Analyst at RBC Capital Markets. Key to whether it happens is the Swiss referendum this Sunday.

The Swiss referendum of 30 November 2014 seeks to: i) Prohibit the Swiss National Bank from selling gold reserves; ii) Repatriate Swiss gold holdings stored abroad; and iii) Require the Swiss National Bank to hold 20% of its assets in gold.

Davis believes a “yes” vote would add to the upward price momentum seen since early November (see chart). He stresses that trendline resistance at 1234 would have to be pierced in order to trigger a trend reversal of any significance. This would then favour an extension to the October high at 1252, followed by stronger trendline resistance drawn from October 2012 at 1266. It is this 1266 level that Davies thinks will need to be exceeded in order to signal that an important shift in sentiment is underway.

A close below support at 1168 on a “no” vote would effectively end the correction, exposing the low at 1130 once again, followed by 1098.

Davis remains bearish, favouring rallies to 1234/1266 as opportunities to sell, with a target of 1130, and using a stop-loss at the 1278 which is the 200-day moving average.

Also of importance is the traditionally inverse relationship of Gold with the US dollar. Davis notes that this correlation is now at its most negative reading since November 2012 (60 day correlation -0.6076) and thus he expects the Swiss referendum to have an immediate impact on the US dollar.

See chart.