Gold has reached a bearish technical milestone after broad-based selling pushed XAU/USD to its weakest daily close since October. While the broader trend favours further downside, nearby support levels and relatively subdued options positioning suggest bears may need to stay nimble.
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XAU/USD Posts First Daily Close Below 4,000 Since October
Gold Breaks Below 4,000 as Dollar Steadies
Gold futures saw a daily close below 4,000 for the first time since October on Thursday. And it didn’t take much of a rise in the US dollar for gold bears to enjoy their breakout. The US dollar index rose just 0.17%, recouping less than a third of the losses accumulated over the previous two days. I had already noted that gold appeared vulnerable to a break lower, given bulls had failed to make any impact despite the US dollar falling a full 1% on Tuesday and Wednesday.
Source: LSEG
Gold's Broad-Based Decline Raises Bearish Risks
Gold’s losses weren’t limited to the US dollar either, as it fell against all major currencies by at least 1.6%. Using gold as the benchmark, the Canadian dollar was the strongest major currency against it, with XAU/CAD down 2% on Thursday. Gold was also just shy of 2% lower against the Australian dollar, Japanese yen and euro. Looking at this week’s performance, gold has lost the most ground against the New Zealand dollar. When gold’s performance is consistently weak across the board, it becomes hard to ignore, and that could put traders on guard for a bearish breakout.
Gold Futures (GC) Technical Analysis
It is hard to argue with gold's bearish trend overall, given its series of lower lows and lower highs. Yet despite the daily close below 4,000, bulls still appear to be putting up a fight. Thursday's bearish engulfing day only closed marginally below the key psychological level, while the June low at 3955.4 is also close by.
We may see a spike lower during the Asian or European session, although the nearby June low could increase the risk of a bearish shakeout and two-way volatility. The October low, just above 3900, also sits close to the weekly VPOC, providing technical support that could stifle any runaway bearish breakout for now.
While downside risks remain, bears may also want to stay nimble given the cluster of nearby support levels. Lower timeframes may therefore be better suited to managing the increased risk of volatility.
Source: ICE, TradingView
Gold Options Markets Remain Calm Despite the Breakdown
A slight word of caution for bears also comes from the options market. Implied volatility is neither rising nor particularly high by this year's standards. Risk reversals also remain elevated, although they edged lower on Thursday to reflect increased demand for puts relative to calls. Yet despite gold trading below its June 11 low, risk reversals remain well above their corresponding lows. That suggests options traders are less concerned about further downside than spot prices currently imply. That view may change if gold eventually breaks below 3,900.
Source: LSEG
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-- Written by Matt Simpson
Follow Matt on Twitter @cLeverEdge
