Is gold on the verge of a breakdown?

At the conclusion of the FOMC meeting last night, the Federal Reserve announced it has ended QE. This was a hawkish move by the Fed which caught a few by surprise, causing the dollar to surge higher and the buck-denominated gold to go in the opposite direction. However the Fed also managed to keep the stock market bulls happy by insisting rates will remain low for a long period. With the dollar and stocks both rallying, investors have found it difficult to hold the safe haven gold, an asset which not only costs money to store but pays no interest or dividends. Today, the dollar found additional buoyancy when the third quarter US GDP was published, showing the world’s largest economy grew by an annualised rate of 3.5% in the third quarter, which was better than 3.1% expected. However the move lasted for only a few minutes before the dollar started heading lower and this prevented gold from falling further lower. The devil was in the detail of the GDP report as consumption and business investment both climbed only moderately while imports were weak too. Indeed, the biggest contributor was government spending, which does not bode well for the recovery. If the US economy is to sustain itself then it should rely on the private rather than the public sector. Nevertheless, the dollar has still remained higher against a basket of foreign currencies while the stock markets have erased their earlier losses to turn sharply higher.

So, as things stand gold is on the verge of another breakdown. Since June of last year, the shiny metal has been making a series of lower highs each time it bounced off the key $1180/5 support area. The most recent rally failed to even go much beyond the shallow 38.2% Fibonacci level, with price also failing to hold above the key $1240 resistance level and also the 50-day moving average. The behaviour of price action thus clearly suggests that the bears have been in the driving seat and now at the fourth time of asking they may be able to finally push the price of gold through the $1180/5 barrier. If they are able to do this then most of the exiting longs will be forced to abandon their positions which would undoubtedly increase the selling pressure even further. Others might even be thinking the unthinkable: “if you can’t beat them, join them” and act by reversing their bullish positions. Therefore, a potential break below the $1180/5 area could see prices drop viciously. In the near-term, the bears might target $1163 or $1138 – these are the 127.2 and 161.8 per cent Fibonacci extension levels of the bounce from early October. In between these levels is the psychological $1150 mark which could also be a target.

But let’s not get ahead of ourselves as there is no guarantee that the buyers would fail to defend their ground this time like they have in the past. At the time of this writing gold is testing a potential support level at $1198 – this being the 78.6% Fibonacci retracement level of the aforementioned price swing. So, there is still a chance gold may bounce back from these levels. The next resistance level is $1222, which was previously support. Given the circumstances, the bulls would do very well to push gold beyond this level in the near-term.

Figure 1:

Source: FOREX.com.