› Will gold lose its shine this year?

Will gold lose its shine this year?

Gold price dropped more than 5% from the peak in February this year on the back of risk appetite and demand for high-yield assets across the globe. However, many analysts noticed a strong demand for gold from central banks and financial institution as a hedging instrument during the turmoil in the fourth quarter of 2018 and January-February this year. Many traders wonder, is that golden rush over, and we should see gold prices falling to $1200 per ounce, or is the recent plunge just a temporary bearish retracement, and we should get ready for another spike in April-May? This article is aimed to figure out several fundamental and technical moments affecting the price of gold.

It’s not a massive surprise that gold prices traditionally surge when equities markets are getting crashed. The same story happened in October last year when US stock indices were sold off on concerns about the economic growth and talks that the US Federal Reserve might hurt the economy with too tight financial conditions. However, if we looked at the long-term weekly chart below (it compares gold price with S&P benchmark), we would see that US stock indices started to recover in January this year, but the gold price kept surging for several weeks together with the demand for high-risk assets. Was that action just a delay in markets reaction? The explanation might be clear if we looked at the chart of US 10-year Treasury yields as the fixed-income investors were absorbing news from the Fed to stop the tightening cycle, make the pause and use a more cautious and patient position. The thing is that bond traders and hedge funds did not believe Powell in his several speeches that the Fed will make such a sudden move, and continued buying gold.

Will gold lose its shine this year?


The inverse correlation, which is normal to safe-haven gold and high-risk S&P, started on March 22, the day when the Federal Reserve officially stopped the tightening cycle, and market players began to price in a possible rate cut by the end of this year. Another reason for such a delayed reaction is that the trading volume in gold assets is massive, and it’s not that easy to reverse such a vast market. The daily chart below shows a large reversal head-and-shoulders pattern. Gold charted the right shoulder precisely on March 22, completed the formation and started to work out the bearish reversal. What’s really interesting is that gold charted an asymmetric H&S pattern as it had two right shoulders. The bullish retracement, which finished on April 2, was a perfect opportunity to enter the market with buying put options for gold as it kept the sequence of lower highs.

Will gold lose its shine this year?


Past week’s price action was not something extraordinary as US stock indices continued testing all-time highs, while NASDAQ even re-wrote historical top of the market. As a result, investors and traders need to sell something before buying equities with such expensive prices. Therefore, safe-haven assets are getting sold-off. If you looked at another asset used by hedge-funds for long-term savings - the Swiss Franc - you’d see that it’s been sold off as well. USD/CHF soared last week on the back of stronger-than-expected retail sales report in the United States. If the carry-trade speculative flow continued and the demand for high-risk emerging markets assets remained steady, then the gold price would lose the ground, plunging to multi-month lows around $1200 per ounce. Otherwise, investors would run back to safety, and the cost of gold will reverse the trend, testing $1300 level again, for the third time this year.

Technically speaking, a momentous event happened last week as gold price breached the 34-weeks simple moving average for the first time since December 3 2018. Moreover, the 13-weeks RSI oscillator crossed the 50% level from above, pointing to a strong bearish momentum. The weekly chart below changed the technical sentiment to negative with plenty of room to go south.

Will gold lose its shine this year?


The daily timeframe has a precise graphical analysis which points to a big chance for a test of nearest support at $1257.70 where two trendlines cross each other: the descending median and ascending support. That horizontal static line also worked as resistance during the downtrend in July 2018. The big question is whether this line will work as support, limiting further slide of the price, or will gold lose its shine and the price will drop towards $1200?

Will gold lose its shine this year?


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