Gold remains in a downtrend, albeit near the upper boundary

At the end of the week, gold is down around 3%, having fallen by more than 4.3% at its low, but found strong support around the $4,540 level. Gold is thus continuing the downward trend that began in the second half of April after testing the 50-day moving average.

The fundamental drivers remain the reassessment of monetary policy prospects towards a tighter stance, which boosts the appeal of government bonds. It is also interesting to note that gold is struggling to capitalise on the US dollar’s weakening momentum, which has had a significant cumulative effect over the month: from its highs on the last day of March, the dollar index has lost 2.5%, whilst gold has lost over 4%, and from its peak in mid-April to the lows of the past week – around 8%. Usually, these instruments move in opposite directions, and the current dynamics look like a warning sign for the precious metal’s medium-term prospects. We see this as a continuation of significant profit-taking following years of growth and are prepared for lower levels in the foreseeable future.

An important checkpoint on the way down appears to be the area around $4,400, where the price consolidated at the end of March. The price may well reach this level next week. A decisive move down from these levels would make a downward trend the central scenario within a broad sideways range, with turning points at the local highs of January, March and April. Movement within this range could become the trend for the next few years, with the final point being a touch of the 200-week moving average (currently near $2,700, but trending upwards).

Gold could have fallen even further had it not been for the resurgence of central bank interest in bullion. According to the World Gold Council, they increased their purchases from 208 tonnes to 240 tonnes in the first quarter. Poland, Uzbekistan and China were particularly active, whilst Turkey, Russia and Azerbaijan were net sellers.