Gold Consolidates After a Sharp Drop on Thursday

Gold prices fell yesterday below lows set around the middle of October. The yellow metal has broken important support that could lead to a bit more downside over the near-term.

ETF

Most of the headlines since yesterday have been about the positive developments in the trade war between the US and China. With this, several have attributed the decline in gold to exactly that.

I argue that it had more to do with the technical outlook for gold and the correlation with the Japanese yen and the price action in that currency. The trade narrative just doesn’t quite line up for me. Equities have been rallying for weeks after all and SPY posted only a marginal gain yesterday.

Better correlation is seen with the Japanese yen and gold prices. The US dollar rallied on Thursday against the Japanese yen to its highest level since the end of May. From the technical side of things, I think it is important to consider a trendline in USD/JPY that is nearby. It is drawn connecting highs from October last year with highs posted in April. This could provide a near-term hurdle.

Going back to gold prices, I think it is important to respect yesterday’s technical development but I don’t expect the yellow metal to fall apart here as a result of it. Or as a result of the trade war developments for that matter.

Looking at the weekly and monthly charts for gold offers a different perspective. Despite recent declines, gold prices are still in a technical breakout. It’s certainly interesting that equities are also in a technical breakout. The two typically carry an inverse correlation. But perhaps this builds best to my case that there are other drivers underpinning gold prices.

At the same time, I think shorter-term traders should weary of further downside. The upside certainly seems limited here and I suspect at best, a range might develop. Things are not aligned for a bullish rally in gold prices. I made an argument for this in a previous article which can be read here.

Gold Daily Nov 8

Having said that, the next area of interest in gold falls at $1452. This reflects a spike high from July. To the upside, I think $1473 offers resistance for the session ahead. This marks the October 11 low. If we manage to get above it, it could be signaling a bit of a broader recovery.

It’s worth keeping an eye out on the greenback here. The US dollar index (DXY) is testing a horizontal resistance level that held it lower three times earlier in the year. It is also testing the 200-period moving average on a 4-hour chart. This could trigger a bit of a pullback which stands to underpin gold prices in the session ahead.