Monday saw gold find some short-covering support around the technically-important $1180 area ahead of the Federal Reserve meeting on Wednesday. If the Fed produces a more dovish policy statement than expected, the dollar could lose further ground and this in turn may provide some support to buck-denominated commodities. Likewise, a more hawkish-than-expected message could send the dollar sharply higher and this could undermine commodities. Given this uncertainty, neither the bulls nor the bears are showing their presence in any meaningful way, hence the yellow precious metal has given back most of the gains made on Monday. In addition to a potentially dovish statement from the Fed, the bearish speculators may also be worried that although gold has not yet responded to higher levels of risk associated with a potential Greek default and an exit from the Eurozone, this could change dramatically if the situation deteriorates further. A lot of traders have probably assumed that the can will be kicked down the road yet again. But now some of these market participants are questioning that assumption and we have seen the stock markets pull back noticeably as a result. Indeed, we don’t think the “Grexit” risks are fully priced in yet and if the unthinkable does happen then equities could drop a lot further. However this also implies that if the Greek situation is resolved favourably, then gold may well underperform heavily as speculators rush back to equities. In any event, I remain sceptical about the prospects of a sharp and sustained rally on gold precisely due to the fact that it has not yet found much, if any, safe haven demand in times like now. Underscoring this view and as already mentioned, gold has given back a good chunk of the gains from the day before as the equity markets have recovered after a weaker start. Thus, if stocks regain their poise on, say, easing worries over Greece then gold could lose further ground.
From a technical point of view, the bulls will be disappointed that the yellow precious metal has failed find some follow-through in buying pressure on Tuesday after Monday’s rally when it formed a bullish outside candle on the daily chart. That rally stalled at the relatively-shallow 38.2% Fibonacci retracement level ($1189/90) of the downswing from the May high (of $1232/3 – point B on the chart). Nevertheless, Monday’s low has not yet been penetrated, so gold could still find some support at these levels. If however it breaks further lower then the next potential stop could be around $1165, a level which corresponds with the bullish trend line. Beyond that level is the long-term 61.8% Fibonacci retracement at just below $1155. Meanwhile a potential break above the recent range highs of around $1190 could pave the way for a rally towards $1200 initially. Thereafter is the convergence of the 200-day moving average with the 61.8% Fibonacci retracement of the most recent downswing around $1205/7.
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