A Gold-en Anchor on Prices

By far the biggest storyline in the markets this week has been the precipitous fall in the price of gold. After closing just below key support at the 1140 level last week, bullish traders panicked this week, driving the yellow metal down by a whopping 5% from last Friday’s close as of writing.

Interestingly, today’s drop has occurred despite a disappointing drop in China’s Markit Flash Manufacturing PMI data. The broad measure of manufacturing activity dropped to a 1-year low at 48.2, far below the essentially neutral 49.8 reading expected. In theory, this weak reading suggests that the People’s Bank of China (PBOC) may have to further expand its accommodative monetary policy, providing a possible bullish fundamental catalyst for gold. However, much like the Grexit and Chinese-stock-market-crash “crises” earlier this month, gold’s failure to bounce serves as a possible ominous warning sign for bulls.

Technical View

Turning our attention to the chart, gold is testing a critical support level around 1085. This zone represents the convergence of two Fibonacci extensions (the 127.2% extension of the November-January rally and the 161.8% extension of the March-May upswing), as well as the intraday lows on Monday and Wednesday. As we go to press, gold is peeking below that support zone, but it may be worth waiting for the weekly close before assuming that it’s been conclusively broken, especially given the deeply oversold daily RSI indicator.

If this level gives way, there’s not much in the way of support until the January 2010 low at 1044, followed by the 161.8% Fibonacci extension of the Nov-Jan rally at 1023. Even if we do see an oversold bounce off the 1085 area, medium-term traders are likely to fade that bounce as long as the metal holds below previous-support-turned-resistance at 1044.