Gold has been stuck in an ugly range for several weeks now. But more recently, the pressure has been growing for a downside breakdown as stocks surged on lockdown easing hopes and amid central bank support. Today, the metal was testing a key support level, and traders were wondering whether support will hold given the still-positive fundamental backdrop, or whether we will see at least a short-term breakdown.
Gold rallied viciously off its March lows as concerns over physical demand were offset by worries oversupply, with many mines closing down or producing at reduced capacity because of the virus outbreak. On top of this, yields were depressed by central banks announcing new rounds of QE and interest rates were slashed. Haven buying also contributed to its upsurge.
However, as risk started to bounce back, gold lost some of its appeal as investors chose to focus more on the racier equity markets, especially US technology names, over the safe-haven precious metal. So, gold’s rally came to a halt and the metal has since been trading sideways, holding for the most part above the $1700 hurdle.
Gold remains fundamentally supported and I continue to expect more gains because of money printing by central banks and low yields. However, I wouldn’t rule out short-term sell-offs here and there.
With that in mind, gold needs to hold THIS 1690-1700 support range:
If we close below then the risk for a proper sell-off would increase, especially if the metal goes on to break below its most recent low at 1670, which was the last low prior to the most recent rally. If gold goes below this level then it would invalidate the short term bullish bias. As such, we could see more liquidation.
However, if support holds here and we go back above last week’s low at 1717 then that could trigger a short squeeze rally. Ideally, we would then want to see gold break above the previous day’s high at 1735, for that will completely invalidate the short-term bearish bias.
So, those are the two alternative scenarios I am watching for gold but as I believe the long term outlook is still supportive, I would prefer to look for bullish than bearish opportunities.