Gold extended the
losses on Friday as the selloff in equity markets continued to weigh on the
precious metal. In fact, gold has been tightly correlated with equities
recently, with the losses likely driven by investors liquidating positions to
cover losses elsewhere in their portfolios.
To understand the
mechanics, imagine that an investment fund holds stocks, gold and government
bonds. Some stocks suddenly crash, and the fund suffers losses on leveraged
positions. The fund may need to raise cash to meet margin calls, reduce
leverage or satisfy investor redemptions. Rather than selling only the assets
that caused the losses, it may sell whatever it can liquidate quickly. Gold is
particularly useful in this situation because it is highly liquid and can be
sold quickly.
This week started
with a positive tone given the lack of US attacks on Iran over the weekend and
the latest diplomatic developments. Iran has proposed
a two-day framework to reopen the Strait of Hormuz in exchange for US
concessions, including sanctions relief, the release of frozen assets and
changes to the US military presence. However, the US has not accepted the
proposal yet.
Nevertheless, the
markets interpreted the shortened timeline for the reopening of the Strait of
Hormuz as a positive development as expectations for a potential deal
strengthened. This could provide some support for gold and limit the downside.
GOLD TECHNICAL ANALYSIS – DAILY TIMEFRAME
On the daily chart, we can
see that gold (CFD contract) extended the
losses on Friday and eventually reached the key support zone around the 3,885
level where we have also the major upward trendline for confluence. This where
we can expect the buyers to step in, with a defined risk below the trendline, to
position for a rally into new record highs. The sellers, on the other hand,
will look for a break lower to increase the bearish bets into the 3,500 level
next.
GOLD TECHNICAL ANALYSIS – 4
HOUR TIMEFRAME
On the 4 hour chart, we have
a minor resistance zone around the 3,980 level. If the price gets there, we can
expect the sellers to step in around the resistance, with a defined risk above
it, to keep targeting a break below the upward trendline. The buyers, on the other
hand, will look for a break higher to increase the bullish bets into new highs,
with the major downward trendline as the first target.
GOLD TECHNICAL ANALYSIS – 1
HOUR TIMEFRAME
On the 1 hour chart, we
have a minor downward trendline defining the bearish momentum on this timeframe.
We can expect the sellers to continue to lean on the trendline, with a defined
risk above it, to keep targeting new lows. The buyers, on the other hand, will
look for a break higher to increase the bullish bets into new highs. The red
lines define the average daily range for today.
UPCOMING CATALYSTS
Today we have
the US ISM Manufacturing PMI. Tomorrow, we have the US Job Openings data and
the US midterm elections. On Wednesday, we have the US ADP and the US ISM
Services PMI. On Thursday, we get the latest US Jobless Claims data. On Friday,
we conclude the week with the US NFP report and the University of Michigan Consumer
sentiment survey.
This article was written by Giuseppe Dellamotta at investinglive.com.
