Gold retreats on stronger dollar stable equities

The price of gold dropped on Thursday after hitting a three-week high around 1126. This retreat follows three consecutive days of substantial gains this week as gold shorts covered and China’s currency devaluation prompted turmoil in the currency and equity markets.

Thursday’s gold retreat gave back some of those gains made in previous days as the dollar regained some momentum and major global equity markets, most notably in the US and China, showed increasing stability after a volatile first half of the week.

The rebound that began at the start of this week broke out above a prolonged consolidation pattern just above late July’s new 5-year intraday low of 1077. This upside break invalidated the bearish pennant pattern that, if it had been broken to the downside, would likely have served as a downtrend continuation towards lower lows.

Instead, the relief rally of the past several days has reinforced the key support zone around 1080-1085, suggesting that a tentative bottom may have been formed. Current fundamentals, however, suggest that gold may have significantly more to fall before establishing any truly sustainable bottom.

Most notably, the US dollar should continue to see gains in the coming months 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.

While a push higher in the price of gold may be possible in the near-term, major upside resistance resides around the 1142 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.