Gold has fallen another 1% even as the US dollar has also extended its declines and the equity markets have started the new week slightly weaker. But is the precious metal about to shine again?
The Dollar Index has dropped to its lowest level since April 2018, thanks to the ongoing rally for the euro and commodity dollars. If the weakness for the dollar persists, this should prevent gold prices to fall further. What’s more, government bond yields have stopped going higher as investors realise the road to economic recovery is going to be a long bumpy one, despite optimism surrounding vaccines and hopefully the potential return to normal life. Falling yields or rising bond prices is usually a good sign for gold and silver, as it boosts the appeal of non-interest-bearing commodities on a relative basis. It should also be noted that even before the pandemic, gold was already in an uptrend. That uptrend accelerated when COVID caused global lockdowns which saw investors pile into the haven assets. We are obviously seeing some of that move unwind now, but as near pre-lockdown levels, the selling pressure on gold might wane.
Meanwhile from a technical point of view, it is worth keeping a close eye on gold prices because it has reached levels where it could potentially bottom out soon. While the recent selling pressure looks significant, the fact is, the metal has not even retraced to the relatively-shallow 38.2% Fibonacci retracement level against the larger rally that begun in 2018. So, the long-term up trend is still intact, even if the short-term picture looks bleak.
Gold has also now reached ‘oversold’ levels of sub 30 on the Relative Strength Index (RSI), which is a momentum indicator. With gold still in a long-term uptrend, the RSI at these levels would probably discourage some bearish speculators from being too aggressive on their bets. This means that there is also the potential for some short-covering to emerge around these levels. Meanwhile, the last time the RSI was around these levels was in March – when gold started a sharp. Back then, the metal had also temporarily broken below the 200-day moving average, something which it has done again now. So, if the past is anything to go by, then gold may form another major low at or around current levels. For confirmation, watch out for a move back above resistance at $1800 to potentially trigger fresh buying interest.
BUT until such a confirmation is evidenced, it is worth remaining cautious as there is always the risk that the sell-off could accelerate as more buyers abandon their positions. I am merely highlighting a possibility
that gold could bottom out, which obviously may or may not materialise. So, be prepared to trade gold on the long side again – only if we see some form of a confirmation first.