Gold prices sank on Tuesday, and along with it, the hopes of many bulls that the yellow metal was about to make another momentum-driven run higher.
Strong risk appetite in the early week was a big driver for the decline, but a dollar recovery also weighed on precious metals. Add to that a major resistance that held gold lower throughout October, and it was not all that surprising to see a turn lower.
What is a bit surprising is the momentum that was behind the decline in the yellow metal versus the dollar. So far, buyers have held it above important support, but the recent downward momentum certainly does not bode well for bulls.
The Dollar Bounces Higher
I think a major factor in Tuesday’s decline is the bounce higher in the dollar. As indicated in the chart above, the US dollar index (DXY) is bouncing higher from its 50-week moving average. This indicator has held it higher since the first test that took place about three weeks ago.
On a 4-hour chart, DXY has started to pull back from resistance that capped a spike during the Fed meeting last week. Similar price action is seen in the price of gold, although the equivalent Fed-inspired spike low was marginally breached.
The dollar had a weak performance in October. It declined by about two percent which was its largest monthly drop since the start of 2018. The DXY monthly chart shows a bearish engulfing candle as a result of the decline in October.
Perhaps the 50-week moving average is keeping DXY underpinned, for now, but I think the bearish monthly pattern will tend to encourage sellers to jump in on rallies.
For the session ahead, I think the dollar has met a significant hurdle and I expect DXY will remain below resistance from the spike high posted during last week’s Fed meeting.
Over the next couple of days, however, I suspect the dollar will try and correct a bit higher.
Gold to Act in a Correlated Fashion
My view on gold at this stage is similar. I think that there is sufficient support here to trigger a bit of a further bounce, but I do foresee a bit more downside.
Yesterday’s drop has accompanied a renewal of calls for a drop to around the $1440-$1460 area in gold.
I have considered such a scenario, but I think forecasting such a move does not take into consideration the strong momentum seen on the larger time frames. Specifically, I’m referring to the breakout that has been in play since June.
The smaller time frames certainly do flash bearish signs, but moving up the time frame on the chart shows that the current turn lower is a small correction in a large bullish push higher over the past six months.
For this reason, I’m sticking with the view that the low is already in (October 1), and that the sideways movement over the past month has been working off overbought conditions.
I’ll mention that this stance took a lot of consideration. The current correction does have ‘the look’ of an uncompleted correction. However, as mentioned, I think the upward momentum on the larger time frames needs to be respected.
But with any viewpoint, there should be an invalidation level. For me, that comes on a sustained drop below $1480.