The improved risk sentiment that emerged during the session yesterday flowed through into the European and U.S. sessions prompting a strong rally in equities and a round of selling in traditional safe-haven assets including gold.
Supporting the move, a Reuters report that Chinese authorities were preparing to further prop up the Chinese economy by cutting the loan prime rate (LPR) and banks reserve requirement ratio (RRR) at its next meeting on February 20th. Also aided by comments from the World Health Organisation (WHO) that the virus did not as yet constitute a pandemic.
While there is never a good time to potentially upset the “gold bugs” amongst us, gold appears increasingly vulnerable to a retreat back to the $1520 area, for a mix of the macro and technical reasons outlined below.
From a macro perspective, while physical demand is not a primary driver of the gold price, demand from China accounts for approximately 30% of the world's physical gold jewellery, bar and coins. The uncertainty created by the coronavirus is likely to impact underlying physical demand for gold.
Technically our medium-term target in gold was the $1600 region, a level that was reached one month later.
Drilling down, the rally from the $1536 low of January 14 to the $1592 high of this week lacks impulsive characteristics. Instead, it appears to be Wave B or the second leg of a three-wave correction. In this light, we see golds overnight fall as part of Wave C or the third and final leg of the pullback which targets wave equality support $1520/15 area.
Providing gold holds the $1520/15 area and in the process forms a bullish reversal type candle we will look to re-enter longs in anticipation of a retest of the $1611 high. This would complete a five-wave rally on both the short term and long term time frames. Keeping in mind that if gold fails to hold the $1520/15 support region, the risks of a deeper pullback towards $1445 increase significantly.
Source Tradingview. The figures stated areas of the 5th of February 2020. Past performance is not a reliable indicator of future performance. This report does not contain and is not to be taken as containing any financial product advice or financial product recommendation