Gold Risk Reversals point to further downside

Gold [XAU/USD] regained poise in Asia on news that North Korea may consider a nuclear test in the Pacific ocean of an unprecedented scale.

The metal rose to a high of $1298 [50-DMA] and has last been seen trading around $1297 levels.

Daily chart

  • The 14-day RSI remains bearish below 50.00
  • Stochastic is oversold.
  • A positive close today and a bullish follow-through on Monday would add credence to the oversold stochastic, also signaling that a short-term bottom is in place.
  • However, the technical correction could be short-lived, if we take into account the risk reversals.

One-month 25-delta risk reversals

Risk reversals gauge fell into the negative territory earlier this month and has extended the drop to -0.65; the lowest level since July 14.

The negative print indicates increased demand for Put options, i.e. downside bets.

Unless there is a notable pickup in the risk reversals, the metal looks set to fade the technical rallies. On charts, the downward sloping 10-DMA [currently seen at $1313] is likely to cap gains.

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