Gold was bouncing back at the time of writing after a rather volatile last few days, to climb back above the $4100 level. A big 8% drop in the space of two days from its record high that was hit just on Monday wiped out approx. $2.4 trillion from its market cap. But all is not lost, as the metal remains above long-term support levels and a shakeout was long overdue anyway. The key question is whether the selling is already over now or whether more downside should be expected now that prices have broken down meaningfully after a long period of time. For as long as central banks continue to remain net buyers of gold, gold will retain its long-term bullish bias. It is possible therefore that we could see more volatility in the days ahead until fresh data from central banks’ net purchases are released within the first couple of weeks of November. Our gold analysis suggests moderate further downside may be on the cards, although prices have already now reached and bounced from a key technical support area around $4K. So, is the selling already over?
Will gold rebound and head to new highs again?
I can’t rule that out, because much of the macro factors supporting gold during its extraordinary rise remain relevant. Government bond yields for example have been on a slow grind lower, lifting the appeal of low-yielding safe haven assets like gold, while persistent central bank buying could continue and maybe even accelerate – if we see evidence of this in data. What’s more expectations of further monetary easing has risen for example from the Bank of England after this week’s weaker CPI data from the UK. A lot will also depend on the direction of the US dollar, which has also played its part. Recently the rebounding dollar has been making gold more expensive for international buyers, but if the greenback resumes lower again then this negative influence will no longer be there. In terms of haven demand, while easing trade tensions between the US and China ahead of Trump-Xi meeting has fuelled a recovery in risk appetite, hopes of a ceasefire and end to the Russia-Ukraine war have been dashed.
So, it is far too early to suggest that the longer term bull trend has ended for gold, especially when you consider that many investors who missed out on the big rally may soon consider stepping in to buy the dip.
But at 8% or so, gold’s plunge is not super significant in percentage terms given how much it has been rising in the last few years. In the grand scheme of things, this is merely a blip so far. Its big, nominal, drop earlier this week was nonetheless eye-catching. The selling was triggered by multiple factors all coming together all at once - from hopes that the US and China will agree to extend the trade truce, reducing haven demand, to a rebound in US dollar and an overall positive risk appetite. Add to this, investors and maybe even central banks probably took profit on their long holding, while gold producers may have hedged to lock in remarkably high prices for future delivery. Gold is a commodity, and one must not forget the impact the supply-side will have when prices move materially high or low, especially in a short window. All this meant there was a lot of selling in a short period of time either willingly or otherwise, causing long-side liquidation.
Gold analysis: Technical view
Following Tuesday’s big drop in gold prices, we saw a continuation of that move yesterday, which meant that gold prices pulled back around 8% from the record highs hit on Monday. The sell-off has been quite abrupt. The reversal happened when gold prices broke below the area of price support around 4,200 (or more precisely the $4186-$4219 range), where it had previously bounced on a couple of occasions. The move below that level triggered stops, which in turn caused the selling pressure to intensify and the market to drop sharply. The selling continued for a second day yesterday, which saw gold finding itself testing an area of support around the $4,000-$4,022 range. It is interesting to see that gold managed to bounce there as we had expected, although this doesn’t necessarily mean the bearish move has already ended.
Anyway, this $4,000-$4,022 range is where the 21-day exponential moving average converges with the base of the prior breakout, and a bullish trendline also comes into play. That trendline has been in place since mid-to-late August, so it is essential to hold to keep the short-term gold forecast bullish from a technical standpoint. But if gold closes below $4,000 today or tomorrow, it would be a bearish technical development. However, as long as prices hold above $4,000, we could see gold consolidate for a few days before potentially starting a new leg higher.
Given how fast the price of gold has fallen recently, it’s best not to pre-empt the move. This area is very important — the line in the sand is around $3,944, which marks the last significant low before gold’s previous breakout. That level needs to hold because a break below it would create a lower low, potentially opening the door for further technical selling towards $3,900 or even $3,800.
For now, though, keep an eye on the $4,000 level or thereabout as a possible area for a bounce, which is now underway. Can we see the metal hold its own around these levels for a while?
Key resistance is now seen around that prior area of support circa $4,200, which sits neatly in the middle of the $4186-$4219 range of resistance. A close above this range would be a bullish sign, which could then see gold start a push towards new all-time highs.
Our gold analysis will evolve deepening on new price action and fundamental information, but there are now tentative signs of a market wanting to create a bottom after a volatile period.
CPI and FOMC to set the tone for US and gold prices
One of the factors behind the recent sharp drop in gold prices has been a rebounding US dollar, with the USD/JPY now near 153.00 and EUR/USD below 1.1600 handle. The US government shutdown, now the second longest in history, has delayed key data releases, leaving markets flying somewhat blind, but traders have been less keen to short the currency given the high overnight financing costs associated with the dollar shorts. But it remains to be seen whether the greenback will be able to rise further without fresh labour market figures to guide traders’ expectations. With investors unlikely to find any major reasons to scale back expectations of two Fed rate cuts by year-end and possibly three by March, sentiment could turn negative on the dollar soon, providing renewed support for the gold prices.
The next major macro catalyst that could impact this gold analysis will likely come from Friday’s delayed CPI print. The CPI data is likely to inject some volatility if it deviates from expectations of +0.4% month-on-month headline or +0.3% core. Next week’s FOMC meeting will be the real test. If policymakers confirm another rate cut, it could signal that the Fed is leaning more dovish, further limiting the dollar’s upside and gold’s downside.
-- Written by Fawad Razaqzada, Market Analyst
Follow Fawad on Twitter @Trader_F_R
