Gold Looks Poised for Oversold Bounce
Fawad Razaqzada | Oct 05, 2023 20:49
For the first time in many weeks, gold is starting to look relatively attractive again. If you loved gold at $2K+, it is now on sale near $1.8K. But will it find buyers is the key question? The sharp $130 (6.7%) drop in the space of a couple of weeks (from its 21st September high) means gold prices are technically oversold and potentially due to a short-covering rally from these long-term support levels.
With the sharp drop in bond yields on Wednesday and a bigger sell-off in oil prices this week (which is disinflationary), there are now solid reasons for some potential bargain hunting. So far, however, the bulls are nowhere to be seen.
h2 But What About Gold’s Long-Term Outlook?/h2Well, to me, there are no questions about gold’s long-term bullish outlook. Given how much inflation has further devalued fiat currencies since the start of the year, when gold last staged a big rally, the metal should be shining more brightly anyway, if it truly is an effective inflation hedge.
The fact that it hasn’t, is almost entirely because of the big falls in government bond prices, lifting their yields to multi-year highs and thereby increasing the opportunity cost of holding the non-interest-bearing commodity. But much of the Fed’s hawkish repricing of interest rates is now done, meaning that the downside for bonds and, by extension, gold should be limited moving forward. That’s not to say gold will necessarily find a bottom imminently. But equally, we are now not too far either, I believe. So, be on the lookout for fresh bullish signals to emerge from here on.
h2 Will Yields Fall Further?/h2On Wednesday we saw yields take a nosedive and that caused the dollar to weaken. Though that move has stalled somewhat so far today, there is a good chance we may see renewed weakness start to creep into the dollar moving forward, as global economic weakness starts to catch up with the US.
If those ADP private payrolls can be trusted (they haven’t been very reliable, truth be told), employment is finally cooling down, helping to ease inflationary pressures further. The big 5% drop in oil prices we saw on Wednesday, and the additional 2% drop so far today, will have also diminished inflation risks. So, keep an eye on bond yields to see if Wednesday marked a top, or was it just a temporary stop ahead of a move to 5%. This week’s main macro event on the US economic calendar is the US nonfarm payrolls report. Expect lots of volatility around the time when the numbers are released. Gold bulls will want to see weaker job figures and more importantly, weaker wage growth.
h2 Gold Technical Analysis: Key Levels To Watch/h2
Get The App
Interestingly, gold is now back in the area around $1805 to $1820, where gold rallied from back in the first few months of the year. Will this zone act as support again, or will the additional gains we have seen in bond yields cause it to break down this time?
Another scenario is we could see a temporary rebound, followed by more losses, before Gold Spot price bottoms out. You don’t need to look at any technical momentum indicators like the RSI (Relative Strength Index) to figure out whether gold is oversold or not. But if you must, you will notice that the RSI has not been this ‘oversold’ since September 2022, when gold bottomed out at $1615.
After falling so rapidly in recent days, even the bears may now be expecting to see an oversold bounce. So, profit-taking from the bears alone could trigger at least a temporary move higher.
For me to turn decidedly bullish on gold, we now need to see a solid bullish reversal candle on the daily time frame, and this needs to be backed by further evidence that yields have topped out.
Trading in financial instruments and/or cryptocurrencies involves high risks including the risk of losing some, or all, of your investment amount, and may not be suitable for all investors. Prices of cryptocurrencies are extremely volatile and may be affected by external factors such as financial, regulatory or political events. Trading on margin increases the financial risks.
Before deciding to trade in financial instrument or cryptocurrencies you should be fully informed of the risks and costs associated with trading the financial markets, carefully consider your investment objectives, level of experience, and risk appetite, and seek professional advice where needed.
Fusion Media would like to remind you that the data contained in this website is not necessarily real-time nor accurate. The data and prices on the website are not necessarily provided by any market or exchange, but may be provided by market makers, and so prices may not be accurate and may differ from the actual price at any given market, meaning prices are indicative and not appropriate for trading purposes. Fusion Media and any provider of the data contained in this website will not accept liability for any loss or damage as a result of your trading, or your reliance on the information contained within this website.
It is prohibited to use, store, reproduce, display, modify, transmit or distribute the data contained in this website without the explicit prior written permission of Fusion Media and/or the data provider. All intellectual property rights are reserved by the providers and/or the exchange providing the data contained in this website.
Fusion Media may be compensated by the advertisers that appear on the website, based on your interaction with the advertisements or advertisers.