With global economies beginning to reopen, fear of depression has given way and gold rally has softened, driving it to a key support level, reports Fawad Razaqzada.
Gold has been stuck in an ugly range for several weeks, but more recently the pressure has been growing for a downside breakdown as stocks surged on lockdown easing hopes and amid central bank support.
Wednesday, 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 over supply, 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 quantitative easing (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 U.S. technology names, over the safe haven precious metal. So, gold’s rally came to a halt and the metal has since been trading side-ways, holding for the most part above the $1,700 support 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 the $1,699 to $1,700 support range (see chart below).
Source: TradingView and TradingCandles.com
If we close below there, the risk for a proper sell-off would increase, especially if the metal goes on to break below its most recent low at $1,670, 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 of $1,717 then that could trigger a short squeeze rally. Ideally, we would then want to see gold break above the previous day’s high at $1,735, for that will completely invalidate the short-term bearish bias.
Those are the two alternative scenarios for gold but with the long term outlook still supportive, I would prefer to look for bullish than bearish opportunities.
Fawad Razaqzada, Senior Market Analyst at TradingCandles.com, is an experienced forex market analyst and economist. He posts market analysis on all sectors from both a technical and fundamental. Previously he served as a market analyst with FOREX.com and City Index.
