As US markets returned to work yesterday after the long Labor day weekend, and an even longer summer, trading for gold started with a bang. The precious metal sold off sharply, closing the gold trading session with a wide spread down candle, and breaking through the key support level in the $1278 per ounce region, as denoted with the blue dotted line. This is a price point, I have highlighted in several previous posts, and for regular readers, you will know I have been short on gold for some time with the technical picture looking increasingly weak. The failure in mid July to breach the $1345 per ounce level was the first signal, followed in August by the failure to move through the deep congestion in the $1315 to $1320 per ounce region. This latter region in particular was significant given the depth of distribution as shown with the red dotted line, a level that had been tested on 19 separate occasions. The wide spread down candle of yesterday, was accompanied by extremely high volume on the daily chart, with 190k contracts traded in the session and validating the bearish sentiment for gold, with heavy selling by the big operators. Having broken through, we can expect to see a deeper move lower for gold in the short term, and if the $1255 support area is pierced, then $1235 per ounce becomes the next target in the move lower. Moving to the fundamental picture, as always gold has many diverse drivers, and with a resurgent US dollar, gold is one commodity that is falling as a result.
Indeed with the dollar index now looking very bullish on the daily chart, following the breakout from the congestion phase of the last few months, this is likely to drive gold lower as a result. Safe haven demand remains weak also, and with tensions easing, and investors moving to other asset classes as risk on sentiment continues to build, buying at present is limited here too. Finally, with little sign of inflation on the horizon anywhere in the world, the prospects for a recovery in gold in the medium term look bleak. For the time being, it’s more of the same, with each short term recovery snuffed out with a deeper move lower. The prospects of a move through $1200 per ounce now look increasingly likely, from both a fundamental and technical perspective, so a gloomy end to the year in prospect for gold bugs I’m afraid, and probably not a very happy new years either!
By Anna Coulling