It lasted a month but gold in $1,800 territory now looks increasingly vulnerable, with bears appearing set to attack the base support for the perch.
It’s a dramatic reversal of sentiment by traders of the yellow metal. Just a week ago gold seemed to be on its strongest march yet toward reprising June’s peaks of $1,900 an ounce, or even the August 2020 record highs of above $2,000.
Monday’s $45-drop, or 2.4% loss, was the largest since Oct. 22 when bullion decisively entered the $1,800 patch with daily price action that did not fall below that mark.
All charts courtesy of skcharting.com
Most importantly, for almost 10 days in a row—between Nov. 10 and 19—gold did not leave the mid-$1,800 level, and even posted a June high of $1,879.35 at one point. That all these occurred while its twin rivals—the dollar and Treasury yields—were also rallying spoke volumes of the most recent gold rally.
So, Where’s Gold Fundamentally Now?
Gold should remain at just where it’s cresting now—between $1,800 and $1,820 —and slowly rebuild itself for a return to mid-$1,800 levels.
But the likelihood of it surviving and enduring in $1,800 territory might be thin given the deliberate attack to end its upward momentum.
There was little reason for Monday’s dump, since the US inflation theme that the gold rally had been riding is still red-hot.
The renomination of Jerome Powell by President Joseph Biden as Federal Reserve Chairman was cited by some as reason, after the relief rally in banking stocks on the Dow that came at the expense of safe havens that include gold.
But the dollar’s rally on speculation that Powell might now raise rates faster—by the first quarter of 2022 versus the last two quarters that had been expected earlier—was as ludicrous as the dump in gold.
The greenback was near a 4-½ year top against the yen on Tuesday on the notion that Powell might turn into a fiscal hawk, having secured his job for another four years.
Anyone who has studied the Fed chief over the 20 months of the pandemic will know that there can not be a greater policy dove than him, regardless of what the fed funds indicator on rates says. Powell’s the creator of the “transient inflation” mantra and will probably not change his spots till he goes. So, if there was a reason to sell gold on his renomination news, there was as good a reason to dump the dollar.
What Is The Technical Outlook For Gold Then?
It certainly isn’t as pretty as it was a fortnight ago, say those in the charting game.
“We may be on the cusp of another fresh near-term trend,” said James Staley, a gold strategist who blogs on DailyFX.com.
“At this point, today’s lows are holding around a spot of prior resistance, taken from around the $1,808 level on the chart.”
Staley said the prior zone of potential support, taken from previous resistance around the $1,834 handle, remains as possible lower-high resistance.
“But, if sellers are aggressive enough to post a new bearish trend, they may not be willing to wait around for a re-test of $1,834. In that case, another spot of possible resistance can be scoped out around the $1,821 level of prior swing support.”
Staley said the bigger question behind the most recent bear flag in gold is whether it can lead to another test of the $1,680 level and, perhaps more importantly, a breach beyond that barrier of support.
“That zone around $1,680, which is confluent with the 38.2% Fibonacci retracement of the 2018-2020 major move, has been tested thrice already in 2021, including the double bottom formation that had built in March and April.”
“On the way down, there’s another spot of potential support around $1,771, which is the 23.6% retracement from the same Fibonacci study from which the 50% marker helped to set current resistance.”
Sunil Kumar Dixit, chief technical strategist for skcharting.com who regularly charts commodity technicals for Investing.com, says gold’s path of least resistance seems lower—though Monday’s collapse could trigger some upward correction too in the near-term.
“The sharp $46 drop took support at the 200-Day Simple Moving Average of $1,802 and settled at the 50-Day Exponential Moving Average of $1,809,” said Dixit.
He added that with Monday’s settlement, the main stochastic signal line read 9.20, while the slow stochastic line was indicated at 11.90.
“Combined, these make gold oversold and a consolidation above $1,800 or a better move above the 50-Day Exponential Moving Average of $1,809 can trigger a recovery to the 38.2% Fibonacci level of $1,825 and horizontal static support-turned-resistance of $1,833.”
Also, consolidation above the $1,833 level, with volume support can extend recovery to pivot to $1,845 and the 23.6% Fibonacci level of $1,860, Dixit said.
But if the bears got their claws on gold forcefully, then few of those recovery targets might pan out, he said.
“Considering the violent long unwinding, the recovery may succumb to bearish designs.”
“Rejection at (or failure to reclaim $1,825-$1,833) can push gold down again to the 200-Day Simple Moving Average of $1,802, which is acceleration point to support clusters that are at the 50% Fibonacci level—precisely $1,795 and the 100-Day SMA of $1,790, or even the 100-week SMA of $1,785.”
Before concluding, I will remind you that while the trend is your friend, you should remember to temper your trades with moderation.
Good luck.
Disclaimer: Barani Krishnan uses a range of views outside his own to bring diversity to his analysis of any market. For neutrality, he sometimes presents contrarian views and market variables. He does not hold a position in the commodities and securities he writes about.