Following
heavy falls during the European session, things got worse as US market participants came to their trading desks. US indices hit fresh session lows and the dollar rose to new highs against all the majors, while gold slumped as the dollar rose sharply. Demand concerns hit commodities across the board, causing crude oil and natural gas prices to slump. Even gold and silver, commodities perceived to perform well during market turmoil, sank – as they did in March when stocks sold off.
So, “risk off” has been written all over today’s session so far, as fears mount that the consumer-led recovery is going to falter if lockdowns are re-introduced with the resurgent virus infections across Western Europe.
However, as I mentioned in my earlier report, I reckon the sell-off, especially for European stocks relative to the overvalued US markets, as well as precious metals, could be limited this time around, and there are reasons to be optimistic about the outlook. After all, things are a lot different than the first phase of the pandemic in terms of immunity, death rates and treatments. What’s more, scientists are now hopefully on the verge of finding effective vaccines. And let’s not forget about all the central bank and government stimulus money flooding the markets, with the potential for more.
With that in mind, I will be on the lookout for potential bottoming formations to emerge on any of the markets that were trending higher until recently – especially gold, because the fundamental backdrop still remains supportive for the precious metal. That said, it could be a long wait. Today, the sellers are having a field day, after repeatedly failing to exert any real pressure on any major market during the post-lockdown melt-up, especially on US markets.
As mentioned, if any market has a chance to rebound, it should be gold – with yields weakening further today and given the overall risk-off tone in the markets.
From a technical point of view, the precious metal was testing a key support level around $1985 at the time of writing. This was the point of origin of the rally from August 12, as per the hourly chart below.
Source: ThinkMarkets and TradingView
So, a potential rebound here should not come as surprise, although given today’s big drop, there will be plenty of bears now looking to fade any short-term strength. Indeed, the metal now faces several resistance levels such as at $1906, a prior support, and that $1920/1 level – the 2011 high – as per the daily chart:
Source: ThinkMarkets and TradingView
What the bulls will want to see is obviously a big rally off the lows. But a daily close either today or at some point later in the week back above $1920/1 would be bullish in my view. We need to see such a bullish development, or another bullish reversal pattern, before turning bullish on gold in the short-term, even if my long-term macro view is still bullish on the precious metal.