Gold: how low can it go?
11:08, 2 October 2023
It’s been a bad couple of weeks for gold bugs with the precious metal sinking to a six-month low.
A key driver behind the gold sell-off has been the strength of the U.S. dollar which was given fresh impetus following the Fed’s hawkish ‘higher for longer comments’ at the latest FOMC meeting.
Given that gold is typically priced in U.S. dollars, a stronger greenback makes gold relatively more expensive, leading to reduced demand and putting downward pressure on precious metal prices.
On the daily candle chart (below) we can see that the spot gold price broke and closed below the summer swing lows. This decisive break of structure has opened the door for a retest of the key support zone created by the early-March swing lows.
Whilst there is very little support prior to the early-March swing lows, it is worth noting that the market is starting to show signs of becoming oversold…
Prices are trading outside the lower Keltner channel – this means that price is more than 2.5 ATR’s below the 20-day average price. It is also worth noting that the Relative Strength Index (RSI) has moved below 30 and into oversold territory.
Gold (spot) Daily Candle Chart
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If we drill down to the 4hr candle chart, we can see that gold is also oversold on this lower timeframe…
Prices are trading below the lower Keltner channel and the RSI indicator is below 30 and showing signs of divergence (making higher swing lows while gold is continuing to make lower swing lows).
Given gold’s bearish market structure but short-term oversold signals, we would expect to see some form of pullback which may create an opportunity to short gold at more favourable levels of risk-to-reward.
Gold (spot) 4Hr Candle Chart
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On this week’s economic calendar, we have S&P Global/Cips services PMI data for the U.S. and a host of other G7 nations on Wednesday and we have US employment data on Friday. These economic events have the potential to increase the volatility of gold.
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