Gold bucks downtrend to touch highest level in three weeks

<p>Gold (daily chart shown below) tentatively surged on Monday to hit its highest level since June 21, when a short-lived relief rally occurred one day […]</p>

Gold (daily chart shown below) tentatively surged on Monday to hit its highest level since June 21, when a short-lived relief rally occurred one day after a rapid collapse brought the precious metal down to a new 5-year low. Monday saw spot gold briefly hit a high above 1108 before paring some of those gains by the afternoon.

Monday’s surge follows weeks of consolidation and a new 5-year intraday low of 1077 that was established in late July. In the process of that consolidation, the price of gold formed a classic bearish pennant pattern that, if it had been broken to the downside, would likely have served as a downtrend continuation towards lower lows.

Instead, Monday’s opposite breakout to the upside has tentatively invalidated the chart pattern and temporarily reinforced the key support zone around 1080-1085.

Gold Daily Chart

 

While the current rebound has provided a much welcomed respite from the sustained price dive of the past several weeks, however, this relief rally is not likely sustainable given the fundamental drivers underlying gold pricing.

Most notably, while the US dollar pulled back on Monday, the greenback should continue to see gains moving forward as the Fed enters into an impending cycle of tightening monetary policy, with the first rate hike expected to begin by the end of this year. Any continued strengthening of the US dollar will place continued pressure on the price of gold, potentially constraining any substantial recovery.

Therefore, pullbacks in the US dollar may temporarily boost gold prices, but if the greenback continues its run as expected, the upside for dollar-denominated commodities like gold should be limited. In the near-term, that limit should be around the 1142 resistance level, which was prior support before its breakdown in mid-July.

To the downside, the noted 1080-1085 support zone continues to be the price area to watch. Any sustained breakdown below that could send the price of gold tumbling down to the next major support levels at 1045 and then 1000, which is both an important psychological level as well as the 261.8% Fibonacci extension of the latest rebound from this past March to May.

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