Gold has been falling sharply of late, dropping by a good $50 in the space of nine trading days. At the time of writing, the yellow precious metal was trading around $1257, its lowest level since December 18. The perceived safe haven metal has been unable to find much demand from flows out of the equity markets which have been tumbling amid concerns over global trade disputes and the outlook for rising interest rates.
Indeed, the trend of central banks turning hawkish has continued in recent weeks. The Fed has indicated that it will probably raise borrowing costs two more times this year, while the ECB’s QE will end at the end of this year – albeit the first rate rise has been delayed – and there are now more hawks at the BOE (3) than expected (2).
As central banks tighten monetary conditions, yields could rise further. This means the opportunity cost of holding noninterest-bearing assets like gold will increase (on a relative basis) along with expectations for higher borrowing costs. Unfortunately for gold, which is priced in the dollar, interest rate expectations in the US have been rising faster than in other regions. This has helped to underpin the dollar and undermine foreign currencies, and pressurised buck-denominated gold further.
Thus, for gold to make a meaningful comeback, the dollar will have to depreciate and depreciate sharply. This can only happen if incoming US macro data were to deteriorate sharply, or the global economy – in particular, the EU – starts to expand at a faster pace than the US economy. However, as things stand, this looks unlikely and we therefore may see further dollar strength in the coming days and weeks. So, the outlook for gold looks bleak.
From a technical perspective, gold’s recent breakdown and acceptable below the key $1300 handle means the path of least resistance is still to the downside. With lots of key short-term support levels broken, it looks increasingly likely that the metal may drop to test the pool of liquidity underneath the previous swing low at $1236 in due course. Incidentally, this is also where a bullish trend line – which has been in place since December 2015 – comes into play. Thus, a bounce of some sort should no come as a surprise around this level. However, the prospect of a breakdown means the sell-off could easily go beyond this level. Short-term resistance comes in at $1261.5 now, with slightly long-term levels coming in at $1283 and $1292.
Source: eSignal and FOREX.com