Gold stabilises

Following a sharp sell-off last Thursday, gold prices have since stabilised. Last week’s weakness was due, among other things, to the strength of US dollar and renewed risk appetite, which saw US stocks rebound after a small pullback the week before. But as mentioned then, I continue to think that the downside could be limited for gold due mainly to the recent falls in global bond yields and the fact that the Fed has dropped its hawkish bias. Although they have rebounded, yields remain near their recent lows and barring a sharp recovery, this should help to boost the appeal of noninterest-bearing precious metals on a relative basis. In other words, the opportunity cost of holding gold has fallen, relative to, say, a few months ago. Last week’s sell-off came on the back of a sizeable rally that started last August. A correction was always needed to shake out the weaker hands and encourage fresh “bargain hunting” in gold.

Interestingly, the metal continues to hover around the technically-important $1290 level, which we had highlighted on Thursday as a potential support. Here, it may have created a potential reversal stick yesterday. If the metal now starts to form a base above yesterday’s high of $1292/3 area then we could see the sellers move out of the way quickly in light of the above fundamental considerations. Thus, a potential rally from here would not come as surprise to us. The last time gold fell this sharply was at the start of March, but then also there was no follow-through to the downside. Could we see a similar pattern unfold this time? Gold will still need to reclaim that $1300/$1305 area to repair some technical damage and lure the buyers back in. However, more pain could be on the way should the most recent low around $1281 gives way first.

Figure 1:

Source: TradingView and FOREX.com.