Gold consolidates gains as dollar rebounds

Another exciting week of trading is drawing to a close and after some downbeat US macro pointers earlier in the week, investors’ expectations about the timing of a Federal Reserve rate rise was pushed further out. As a result, the dollar fell while stocks rallied on hopes of lower interest rates for longer in the US and fresh easing elsewhere, most notably China. The weaker dollar helped to boost the price of gold, too. However, the slightly stronger-than-expected core CPI print and a sharp drop in weekly unemployment claims on Thursday as well as an unexpectedly sharp improvement in consumer sentiment as reported by the UoM today caused the dollar to stabilise a little. Consequently, gold’s rally has come to a bit of a halt. Clearly, some traders are also booking profit ahead of the weekend and this is applying additional pressure.

As we reported earlier this week, the precious metal’s technical outlook has improved significantly (see “Golden times ahead for the yellow precious metal?” for more). While I am still bullish on gold in the short term and as tempting as it might be to think that it has found a bottom, this is not the first time we have seen such a bullish-looking breakout that has ultimately proved to be a mere short-covering rally. This time of course the slightly deprecating US dollar has supported the rally, but with the world’s other major central banks still being extremely dovish, the US currency could come back to life quite quickly and weigh on the buck-denominated gold.

The breakdown of the long-term bearish trend line and resistance at $1170, as shown on the weekly chart, is clearly a bullish development for gold. But the precious metal still resides within a bearish channel and until/unless it breaks out of this too then one should proceed with extra caution. Indeed, as the daily chart shows, it has already arrived at the first of our two key short-term bullish targets, namely $1190. This level corresponds with a Bearish Gartley/Bat pattern in that it marks the convergence of point D of an AB=CD formation with two Fibonacci levels i.e. the 50% retracement of XA and 127.2% extension of BC price swings. The extended point D and a more significant Bearish Gartley entry point is at around $1215/20 (which is our second bullish target – area circled on the daily chart). This is where the 61.8% retracement of XA and 161.8% extension of BC price swings converge. The resistance trend of the long-term bearish channel would come in around the $1220/30 area, depending on the speed of the potential rally.

The bears meanwhile will first and foremost want to see gold stall at around the abovementioned resistance levels and then break below the 200-day SMA, currently at $1176, on a closing basis. The bullish technical outlook would become invalid upon a decisive break back below the $1150 handle. In this scenario, gold may then drop back towards its 50-day SMA, currently at $1133, before deciding on its next move.