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Gold’s failure to shine on Black Monday is worrying

by Fawad Razaqzada

During most part of the stock market turmoil last week gold managed to rally sharply as investors sought safe haven assets. Appetite for riskier assets fell in part because of renewed concerns about the health of China, the world’s second largest economy. Concerns were raised following the release of some weaker macroeconomic numbers, including the most recent manufacturing PMI, and the decision by the People’s Bank of China to sharply devalue its currency. The PBOC was at it again on Tuesday as it further loosened its monetary policy in its latest attempt to shore up confidence and support growth. This helped to support equities on Tuesday, thought the markets had been sharply higher even before the news of the rate cut came out. If the stock market bulls fail to sustain the kick-back rally it would suggest that either the PBOC's easing measures were already priced in or simply not bold enough.

But given the fact that the precious metal was unable to benefit from Monday’s stock market crash, we are sceptical about the precious metal’s ability to sustain its recent advance. If Monday’s events were not enough of a reason for the gold bulls to come out en masse then what would it take for them to do so? Also, the US dollar apparently failed to find much safe haven demand on Monday with the EUR/USD surging higher and USD/JPY tumbling, though it did well against emerging market and commodity currencies. Normally, the combination of weaker dollar and stocks would have boosted the price of gold, but it didn’t on Monday. This could be a sign of things to come for the remainder of this week, especially if the stock markets stabilise further.

But from a technical point of view, gold’s decline over the past couple of days make some sense. As can be seen from the chart, the precious metal has come under pressure because of the concentration of several technical factors around the $1165/70 area. Here, the 100-day moving average meets a medium-term bearish trend line and the 38.2% Fibonacci retracement of the downswing from the 2015 high that was achieved in January at $1307. Thus it is likely that the bulls took some profit here and some bears re-entered at better levels.

On Tuesday gold was testing a pivotal level around $1145, which had been support and resistance in the past. If the bears manage to push gold below this level on a closing basis then we could see further losses in the days to come. Otherwise, a rally back towards, and potentially beyond, the $1165/70 area could be on the cards. The next potential level of support is around $1135/6; this is where the 38.2% Fibonacci retracement of the recent up move meets the 50-day moving average. Further supports could be around $1125 or the 61.8% Fibonacci level at $1112/3. On the upside, a break above the aforementioned $1165/70 resistance area would technically be very bullish. That’s because it would also confirm the break out from a potential falling wedge bullish pattern. That being said, gold does tend to respond very well to the 61.8% Fibonacci level, which hasn’t been tested yet for the shorter-term downswing that began in May, at $1173. Thus a decisive break above the $1173 level is needed in order for the metal go for the 200-day moving average at $1188 or the 61.8% retracement level of the larger swing around $1220, before deciding on its next move.

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