Technical Outlook: Gold Tumbles to 4-Month Low

The primary culprits behind Gold’s sharp decline revolved around the better-than-expected U.S business activity data and rising optimism over the progress in a Covid-19 vaccine. Appetite towards the safe-haven asset took another hit amid the triggering of a formal transition process to President-elect Joe Biden. With Biden set to nominate former Federal Reserve Chair Janet Yellen to become the next Treasury secretary, this may boost the prospects for further fiscal and monetary stimulus given her reputation as a dove. Such a move has been welcomed by investors, further pressuring Gold which has weakened over 2% since the start of the week.

Now that Gold bears have awoken from hibernation and broken below the $1850 support level, the path of least resistance for the precious metal points south. Given how the MACD trades to the downside and the death cross technical formation – (where the 50-day simple moving average crosses below the 100-day simple moving average) is in play, bears are currently in the driving seat. Sustained weakness below the $1850 support may open the doors towards $1815 level and the psychological $1800 level above the 200-day simple moving average.

Zooming out to the weekly timeframe, a solid close below the $1850 could signal the start of a bearish trend. Prices are already trading below the 20 SMA while the MACD is displaying early signs of crossing to the downside. Should bears keep prices below $1850 this week, previous support could transform into a dynamic resistance that encourages a decline towards $1800 and $1760.

For those who are focusing on the shorter timeframes, there are some interesting developments on the hourly charts. An intraday rebound towards the $1840 level could be on the cards. Should this level prove to be reliable resistance, prices may decline back towards the $1820 level. If the risk-on mood further dampens appetite for the safe-haven asset, prices may break below $1820 with the psychological $1800 a key point of interest.

Back to the fundamentals

While the positive vaccine news is set to impact Gold in the near term, the medium to longer term outlook may be influenced by lower interest rates and possible rise in inflation. Given how the Federal Reserve is expected to leave interest rates unchanged until at least 2023, the central bank could expand its QE program to support the US economy. Such may weaken the Dollar – essentially providing support to Gold.

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Published by

Lukman Otunuga

Lukman Otunuga is a research analyst at FXTM. A keen follower of macroeconomic events, with a strong professional and academic background in finance, Lukman is well versed in the various factors affecting the currency and commodity markets. Lukman provides in-depth analysis on the global currency and commodity markets and is often quoted by leading international media outlets such as: MarketWatch, CNBC, NASDAQ, Reuters, AFP, The Guardian and Yahoo. Prior to joining FXTM, Lukman spent two years as a research analyst with international currency broker FXCM, where he focused on a technical and fundamental analysis of the global currency, commodity, and stock markets. Lukman was also responsible for leading educational seminars for international and local high net worth individuals, and has published a series of educational articles on forex trading with City A.M. Lukman holds a BSc (hons) degree in Economics from the University of Essex, UK and an MSc in Finance from London School of Business and Finance, where he studied corporate finance, mergers & acquisitions and the role of international financial institutions