This website uses cookies to provide you with full functionality and the best possible user experience. By continuing to use this website you agree to our cookies policy. Find out more. Close

Gold Bounces Back as Oil, Stocks Ease

by Fawad Razaqzada

The big news on Tuesday was that large oil producer nations Russia, Saudi Arabia, Qatar and Venezuela have all reached a conditional agreement to freeze, rather than cut, their crude oil production at January levels. The news disappointed because some market participants wanted to see an actual output cut. What’s more, the agreement means production will be frozen at already record levels. In other words, the excess surplus will remain in place, for now. Consequently, oil prices were quick to give up earlier gains before turning lower on the session. Nevertheless, the agreement is a step in the right direction and if other major producers follow suit then this, at the very least, should help to allow demand to catch up with supply and thus prevent oil prices from suffering further big falls. For now though, the disappointment means oil prices could fall further in the short-term. This could be a bearish outcome for the stock markets after equities enjoyed a noticeable bounce over the past couple of trading sessions. The resulting rise in risk eversion has unsurprisingly given gold a boost. On Tuesday, the precious metal was back above $1200, trading at a good $1213 per troy ounce at the time of this writing.

Last week saw gold surge higher as demand for safe haven assets jumped due to the tumbling stock markets. Positioning data from the CFTC confirmed this on Friday, showing that bullish bets on gold had increased sharply to a three-month high in the week to 9 February. ETF inflows have also been rising noticeably recently. So, the scope for profit-taking was considerably high and that is exactly what happened on Monday. What gold does next will depend to a great degree on the direction of the stock markets. If equities fall back sharply now that they have had a decent bounce then gold may be able to rise further. In my view, there is a good chance of this happening.

Indeed, the pullback has seemingly offered traders who missed out on the initial chance to go long last week another opportunity. The precious metal bounced strongly after finding good support from the previous resistance around the $1190/$1200 area on Tuesday morning. Going forward, this area will need to hold in order for gold to maintain its bullish bias. Thus a potential break below here would be a bearish development, which could see the metal drop back all the way to its 200-day moving average at $1130 (which also corresponds with the 61.8% Fibonacci retracement level).

On the other hand, if gold manages to break out of its long-term bear channel around the $1250 area at the second time of asking then further sharp gains could follow this week. In this scenario, the metal may at the very least go on to test the 2015 high around the $1307/8 area. But there is potential for a more significant recovery towards the $1380 area where the 38.2% Fibonacci retracement level of the entire 2011-2015 downswing meets with the 127.2% extension of the downswing from the 2015 high.

fawad-razaqzada-gold-2016-02-16

From time to time, GAIN Capital UK Limited’s (“we”, “our”) website may contain links to other sites and/or resources provided by third parties. These links and/or resources are provided for your information only and we have no control over the contents of those materials, and in no way endorse their content. Any analysis, opinion, commentary or research-based material on our website is for information and educational purposes only and is not, in any circumstances, intended to be an offer, recommendation or solicitation to buy or sell. You should always seek independent advice as to your suitability to speculate in any related markets and your ability to assume the associated risks, if you are at all unsure. No representation or warranty is made, express or implied, that the materials on our website are complete or accurate. We are not under any obligation to update any such material.

As such, we (and/or our associated companies) will not be responsible or liable for any loss or damage incurred by you or any third party arising out of, or in connection with, any use of the information on our website (other than with regards to any duty or liability that we are unable to limit or exclude by law or under the applicable regulatory system) and any such liability is hereby expressly disclaimed.

Don't have an account?

Open a trading account with us and start trading forex.

Create an account

Got some trading ideas?

Make the most of any trading opportunity

Log in and Trade

Contact us: