Could Gold Go Lower from Here?

After yesterday’s dynamic price drop, the real question is will gold go lower or will it rally from here? The possible answers are entirely different when you look at the technical data and when you then look at the fundamental events behind the selloff in gold.

On a technical basis, gold is over-sold. This week gold broke below the 0.618% retracement as it traded through and below $1,218 per ounce. This retracement began after the third attempt to take out the former highs in gold at $1,370.

The last major rally occurred at the end of 2016 when gold gained roughly $246 as it traded from $1,124 to $1,363 in September of last year. After reaching a high, gold prices corrected approximately 50% before bottoming at $1,240 per ounce in December. What would follow would be three unsuccessful attempts to breach price resistance just above $1,365 per ounce.

Gold has lost roughly $168 in value since April of this year. While many technical indicators suggest that gold pricing is oversold, the fundamentals which have been driving prices lower continue to persist and, as such, there is a high probability that the selling will continue and that gold prices will move lower.

The most prevalent factor taking gold prices lower is strong risk-on market sentiment. Equities continue to gain value and return profits to their investors. The second major factor is dollar strength, which continues to be the most substantial force weighing on gold pricing.

Lastly, the safe-haven appeal of gold during times of geopolitical uncertainty has diminished to a great extent. It is the U.S. dollar which becomes the most predominant safe-haven vehicle in times of uncertainty.

Unless the fundamentals that have been driving gold prices lower change, it is difficult to perceive that gold will move back into a rally mode. Based on our current technical studies we believe that the next major level for support in gold futures is $1,178 per ounce. That price point is the 0.78% retracement of the $246 rally that began in December 2016.

Major resistance resides at $1,218 per ounce, which is the former support level that was taken out this week. Support and resistance are part and parcel of the same thing. Once support is breached and taken out, it then becomes resistance. We would need to see gold effectively trade and close above $1,218 to indicate any kind of pivot or key reversal has occurred in this current downtrend.

Wishing you as always, good trading,