Top Story

Can gold sustain breakout as stocks extend drop?

Owing to the risk-off tone in the markets, gold is up for the third consecutive day. At a good $1300 per troy ounce, the yellow precious metal climbed to its best level since November of last year before pulling back slightly. The safe haven metal’s slow and steady ascend throughout this year has been warning us that something big was about to happen. Although it is far too early to say whether global equities will be staging a sharp correction in the coming days, things don’t look pretty on Wall Street at the moment. The major US indices were hitting fresh lows on the month at the time of this writing. Precious metals have also been supported by ongoing weakness in US dollar. The recent soft patch in US data has put serious doubts over whether there will be another rate hike coming from the Fed this year. Any further deterioration in US data could see the Fed drop its hawkish stance. That being said, with most of the negatively already priced in, it wouldn’t take much to support the dollar now. Unfortunately next week’s economic calendar is quite light. Thus, the dollar may weaken further, especially against perceived safe haven currencies like Japanese yen and Swiss franc, and potentially gold and silver if one assumes that equities will remain out of favour. But in the event stocks and/or the dollar manage to stage a recovery then gold may fall out of favour again.

For now, though, the path of least resistance remains to the upside. As mentioned, gold and silver have both broken above some key resistance levels, so they could be on the verge of a potentially sharp move higher. The grey precious metal has taken out its 200-day moving average while the yellow metal has cleared sturdy resistance in the $1295 area. If the breakout is to be sustained here then we could see significantly higher levels for both metals in the weeks to come. Gold’s next bullish objective would be the 127.2% Fibonacci extension level of the last downswing at $1320. The 161.8% extension of the same price swing comes in at $1351/2 area. Beyond these levels, last year’s high will be in focus next, at $1375. But the fact that the long-term bearish trend line has been taken out, gold may be on the verge of an even larger rally.

But let’s not get too far ahead of ourselves. Gold’s technical outlook would turn negative in the event it drops back and holds below the $1295 breakout level on a daily closing basis. If this were to happen then we could see some sort of a correction as bullish speculators rush for the exits, particularly if the last low prior to the latest breakout at $1268 gives way. This is not our base case, but I am merely highlighting the possibility in the event the bullish scenario does not play out as expected. One has to be prepared for all possibilities and have a flexible mind-set when it comes to trading.

Source: eSignal and FOREX.com.

Disclaimer: The information on this web site is not targeted at the general public of any particular country. It is not intended for distribution to residents in any country where such distribution or use would contravene any local law or regulatory requirement. The information and opinions in this report are for general information use only and are not intended as an offer or solicitation with respect to the purchase or sale of any currency or CFD contract. All opinions and information contained in this report are subject to change without notice. This report has been prepared without regard to the specific investment objectives, financial situation and needs of any particular recipient. Any references to historical price movements or levels is informational based on our analysis and we do not represent or warranty that any such movements or levels are likely to reoccur in the future. While the information contained herein was obtained from sources believed to be reliable, author does not guarantee its accuracy or completeness, nor does author assume any liability for any direct, indirect or consequential loss that may result from the reliance by any person upon any such information or opinions.

Futures, Options on Futures, Foreign Exchange and other leveraged products involves significant risk of loss and is not suitable for all investors. Losses can exceed your deposits. Increasing leverage increases risk. Spot Gold and Silver contracts are not subject to regulation under the U.S. Commodity Exchange Act. Contracts for Difference (CFDs) are not available for US residents. Before deciding to trade forex and commodity futures, you should carefully consider your financial objectives, level of experience and risk appetite. Any opinions, news, research, analyses, prices or other information contained herein is intended as general information about the subject matter covered and is provided with the understanding that we do not provide any investment, legal, or tax advice. You should consult with appropriate counsel or other advisors on all investment, legal, or tax matters. References to Forex.com or GAIN Capital refer to GAIN Capital Holdings Inc. and its subsidiaries. Please read Characteristics and Risks of Standardized Options.

The markets are moving. Stop missing out.

Open an Account