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Could Gold Prices Be Oversold?

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For the second day in a row, gold prices have closed higher on the day. Is it time to look for a potential bottom? More importantly, are gold prices in oversold territory? While it might be a little early to have a definitive answer as to whether gold prices have bottomed, we see the necessary technical indicators that would be present at a price point which is found in technical support.

The most recent price correction in gold occurred after a defined rally that took pricing from $1194 up to $1296. Historically speaking, a typical rally in gold will move prices anywhere from $100 to $160 higher. Very rarely do we see gold rallies result in an outcome dramatically higher than $160 or significantly lower than $100.

The first rally of this year began in December of 2016 when gold prices had reached a low of $1120. That correction was directly tied to the presidential election in November, which initially caused gold to trade about $50 higher following the election results, only to sell off dramatically during the evening after the presidential election. However, it would take approximately two months of continued selling before gold prices found support at the end of December.

From December of last year up until the end of February, gold prices rose dramatically, beginning at $1120 per ounce and topping out during the last week of February at $1260 per ounce. A small correction immediately followed that moderate rally brought gold prices back below $1200 per ounce. In mid-March of this year, gold prices began the second leg of the rally which began last year. This second leg took gold prices just below $1300, when on an intraday basis gold prices reached $1297 per ounce.

The second leg of the rally was fueled by multiple factors that included geopolitical tension in North Korea and Syria, as well as a weaker than expected first quarter GDP. However, as calmer waters emerged, as well as an updated GDP model by the Atlanta Fed which forecasted a very robust second-quarter GDP potential of 4.3%, market participants witnessed surging equity prices, a dynamically stronger U.S. dollar, and significant downside pressure in both gold and silver pricing.

These factors helped drive gold prices off the yearly high at $1297, losing over 78% of those gains, to trade to a low of $1213 earlier this week. Although two consecutive days of higher pricing does not signal a bottom, a multitude of technical factors might be a strong indication that gold prices are oversold and ready for an upside bounce.

Wishing you as always, good trading,

Gary S. Wagner - Executive Producer