Gold shines at new seven-month high on sharp plunge in equities

The further plunge in global equity markets that has marked the beginning of this new trading week has understandably helped to prop up certain assets that are considered safer alternatives to volatile stocks. These "safe haven" instruments include the Japanese yen and gold.

In the case of gold, this persistent volatility in equities has been joined by a recent drop in the value of the US dollar along with lowered expectations of further Fed rate hikes this year, all of which have helped to prop up the price of gold. This price movement is partly due to the fact that gold is denominated in US dollars, so an inverse correlation exists between the precious metal and the dollar. Additionally, if interest rates do not continue to rise in the US, there will be less of a reason for investors to abandon gold, which is a non-interest-paying asset.

From a technical perspective, the price of gold for the past three months has formed a rounded bottoming pattern with its lowest points just under the key $1050 support area. After those lows were reached in December, gold has risen rather erratically, but began to accelerate in a sharp incline in late January.

Since then, price action has climbed above several key resistance levels and factors, including the $1100 level, the 200-day moving average, the $1140 level, and most recently, $1170. Monday has seen a further rise to re-test and then tentatively break out above the resistance imposed by October’s $1191-area peak, resulting in a new seven-month high.

Technically, this breakout is highly significant and underscores the strong bullish momentum that is currently driving the price of gold. With continued stock market volatility along with dollar weakness due to low rate hike expectations, the next major upside target for gold currently resides around the $1225-1230 resistance area, last reached in May of 2015. Above that, on any further upside momentum, is the major $1250 resistance objective.

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