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Gold closes below a critical support level indicating a further decline

Commentaries & Views

Gold has been and continues to trade under pressure. Now for the fourth week in a row (even though it’s only Tuesday), gold prices have declined, with the weekly chart showing gold has traded to a lower low and a lower high for the last four consecutive weeks. Recent selling pressure began to occur immediately following the release of this month’s FOMC’s meetings statement coupled with the press conference with Chairman Jerome Powell. The Federal Reserve’s more hawkish demeanor had a cascading effect taking yields on U.S. debt instruments higher, taking the U.S. Dollar higher, pressuring gold lower, as well as now taking U.S. equities lower as well.

Today the selling pressure accelerated as gold futures gave up just over 1%. As of 5:10 PM EDT gold futures basis, the most active December 2021 contract is down $18.10 and is currently fixed at $1733.90. Concurrently the U.S. dollar gained just shy of 4/10 %, with the dollar index currently fixed at 93.75. This is the highest closing value of the dollar index in 2021. The last time the dollar had this much strength against the basket of currencies it is paired against was in November 2020, when it reached an intraday high of 94.30.

In previous reports, we have spoken about a key and critical level of support that occurred at approximately $1738, which was based upon Fibonacci harmonics. A Fibonacci harmonic occurs when two different data sets have key Fibonacci retracement levels that occur at the same price point.

In the case of this technical study, we used an extremely long-term data set which began in September 2018 when gold was trading at $1167 up to the record high in gold that occurred in August of last year at $2088. This was viewed against an extremely short-term data set which begins at the lows achieved during the flash crash in August that occurred as a response to an extremely robust jobs report up until the highs seen at the beginning of September when gold traded to $1836.

Both the long-term and short-term data set revealed a key Fibonacci retracement level at $1738. In the long-term data set, that price point was a 38.2% Fibonacci retracement from the lows in 2018 to the record high in August 2020. Concurrently the very short-term data set revealed that $1738 was a 61.8% Fibonacci retracement. On a closing basis, that harmonic price point was taken out today, with gold futures currently fixed at $1733.90.

Based on these studies, we could see gold trade to a low of $1677, which corresponds to the lows achieved during the flash crash in August and the double bottom that occurred earlier in March. If gold does continue to trade lower, as the current fundamentals indicate, gold could trade as low as $1677. The next major support level below that price is $1628, the 50% retracement level of the extremely long data set we used above.

Alarmingly we have the components of a perfect storm scenario with U.S. debt yields rising dollar strength and now the possibility that there will be a continued stalemate in Congress as both Republicans and Democrats attempt to find a compromise to raise the debt ceiling before the government runs out of cash which would occur in the middle of October if the stalemate in Congress continues. This scenario has never happened before, so it seems more plausible that if Congress continues to have a bipartisan agreement, they will probably "kick the can down the road" by implementing a stopgap bill to fund the government through December.

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Wishing you, as always, good trading and good health,

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