Gold’s resilience this week has been remarkable in the face at least two bearish factors, namely the US government re-opening and US-China trade truce, being removed. Despite the recovery, and everyone being so bullish on gold prices, could we now see some pressure emerge to put a slightly bearish tilt to the gold analysis heading into the latter stages of the week? Objectively speaking, I think we should be expecting that, but price action hasn’t shown any hints of bearish characteristics thus far this week. Will that change?
Gold analysis: should gold be heading lower?
Well, gold is up for the fifth day today and momentum has clearly been there to underpin prices this week. But I am at least a tiny bit surprised how resilient gold has been in the last few days when you consider the fact we have had some bearish influences to take into account. Among other things, the most obvious being the government re-opening, which was being priced in the stock markets in the last few days. Meanwhile, the US and China recently agreed on a trade truce, which is another risk-positive development.
So, with both of these two factors you’d expect that would remove some haven demand from gold. Well, so far, there is not much evidence of that, which can only mean one thing: people are still expecting to see continued central bank buying. That is another risky assumption as even central banks might be wary of overcooked prices here.
So, at just below $4250 resistance, I would be cautious to chase this rally here after a 5-day winning run and given the reduction of bearish macro factors mentioned. Therefore, I would actually be on the lookout for a bit of profit-taking to take prices back down to near $4K level in the coming days and weeks. So far, though, there are no signs of any bearish price action.
Technical gold analysis and key levels to watch
From a technical standpoint, the chart of gold is still bullish but with the metal now entering a key area between $4200 to $4250, one needs to be careful chasing this rally. Here, gold is testing a prior support area that gave way during that big sell-off on 21st October, when a breakout to a new record was sharply rejected. That marked a turning point in gold’s direction for the next several days and prompted us to declare at least a temporary top in the gold forecast. Whether or not we are still in that temporary phase concerning gold’s direction remains to be seen. But a lot will now depend on what gold does here. This is where the sellers really need to step in again after their efforts at the back end of last month to suppress gold prices.
Let’s assume that we will see some selling activity here. In this scenario, gold may then drop to test the next support level around $4140 to $4150 area. But if that area also gives way, then a quick drop to $4,000 would be my next best guess.
On a side note, the monthly gold price chart is still technically extremely overbought, and it will need a long period of time to undoing from those extremes. Therefore, in the grand scheme of things, even if we do see some two-way volatility here, and drop in gold prices to say slightly below $4K in the months ahead, this will all be considered a pullback in the long term trend.
But focusing back to the short term, let’s see first and foremost whether the sellers will show up again or will they succumb to the momentum and instead see new highs in gold prices.
Meanwhile, in from a bullish gold analysis point of view if resistance fails to hold here and we push through it, then $4,300 is the next upside target ahead of $4,400 next, which would mark a new high for gold should we get there.
-- Written by Fawad Razaqzada, Market Analyst
Follow Fawad on Twitter @Trader_F_R
