(Kitco News) – As precious metals investors watched gold prices slide from a high of $2,800 per ounce only two weeks ago to just over $2,500 per ounce this week, analysts and traders have been working overtime to contextualize the magnitude of the move, and to try to determine the likely near-term floor for the yellow metal. And while gold holders are reassured to hear that all the medium and long-term tailwinds behind bullion remain in effect, they remain anxious as they watch gold prices decline further day after day.
“This week alone, gold prices have fallen nearly 5%, marking the steepest weekly decline in almost three years,” noted Alex Kuptsikevich, senior market analyst at FxPro. “From its peak, the metal has now lost over $250 or approximately 9%, making this the most sustained downturn since the start of the month.”
He pointed out, however, that despite this sharp pullback, “gold's recent rally since last October means that even a drop to $2,400 would represent only a correction, bringing the price back to the 200-day moving average. At the current pace of decline, gold could reach this level before the end of the year.”
In terms of the technical picture, Kuptsikevich said that a significant bearish signal has emerged on the weekly charts: “a sharp drop after gold exited the overbought zone, accompanied by the RSI (Relative Strength Index) turning down from levels above 80. This kind of reversal at extreme levels often signals a shift in momentum.”
“To understand the implications, we can look to historical precedents,” he said. “The last two instances of a sharp bearish reversal from overbought conditions at all-time highs occurred in 2009 and 2011.”
He noted that in 2009, “gold saw a 15% peak-to-trough loss before renewed buying pushed the price to fresh all-time highs. This bull market lasted nearly two years, with only brief pauses.”
Then, in 2011 gold’s initial drop was almost 20%. “While gold rebounded 17% afterwards, the bull market's backbone had already broken,” he said. “Over the next four years, gold lost 45% of its peak value.”
Kuptsikevich said that in both cases, the 50-week moving average acted as medium-term support during the sell-offs. “Currently, this moving average is at $2,330 but is trending upward and could reach $2,400 by the end of the year,” he said. “A decisive break below this level may trigger an even deeper decline.”
Naeem Aslam, chief investment officer at Zaye Capital Markets, acknowledged the precious metal’s recent weakness but sees a number of factors that could provide a course correction for the price action.
“There has been substantial downward pressure on gold prices in the past few days as a result of a strengthened U.S. dollar and changing expectations regarding Federal Reserve monetary policy,” Aslam said, noting that gold is set to post its biggest weekly loss in months.
“Traders and investors are concerned that the yellow metal could face even more challenging time in the coming period as the Fed is in no rush to change its monetary policy anytime soon given the fresh economic readings,” Aslam said. “However, bargain hunters are looking at the situation from a different lens.”
He pointed out that while the stronger dollar and the expectation of fewer rate cuts are impacting the gold price, several factors could change its trajectory in the coming months.
“Gold's allure as a safe-haven asset may be bolstered by global economic uncertainties, such as trade disputes and geopolitical tensions.,” he said. “Investors may seek refuge in gold in the event that uncertainties intensify.”
Inflation may also change the calculus for the precious metal. “The Federal Reserve may be under increased pressure to modify its policy if inflation continues to exceed expectations,” Aslam said. “Gold could ultimately benefit from persistent inflation if it surpasses interest rate increases.”
Comments from Federal Reserve members will also have an impact, as they did on Thursday when Governor Kugler suggested the pace of rate cuts could slow. “The upcoming speeches and statements of Federal Reserve officials, including Chair Jerome Powell, will be closely monitored,” he added. “Gold prices could be substantially affected by any indications of a change in monetary policy.”
Lastly, the dollar’s recent outperformance could be retraced. “The demand for gold could be increased if the U.S. dollar begins to deteriorate as a result of domestic or international factors,” Aslam said.
Next week’s economic calendar is on the light side once again, with the focus squarely on the housing sector. Markets have U.S. housing starts and building permits for October on Tuesday, MBA mortgage applications on Wednesday, and existing home sales for October on Thursday. Other highlights include the Philly fed manufacturing index on Thursday, with market participants watching to see if the Philadelphia area sees the same dramatic surge in activity as nearby New York State, and finally, University of Michigan consumer sentiment for November.
There will also be a number of central bank speakers to watch out for as markets attempt to gauge the speed and depth of upcoming rate cuts, including the Fed’s Goolsbee on Monday, and Hammack with Goolsbee again on Thursday.
Economic data to watch next week:
Tuesday: Housing Starts & Building Permits OCT
Wednesday: MBA Mortgage Applications
Thursday: Weekly Jobless Claims, Philly Fed Mfg Index NOV, Existing Home Sales OCT
Friday: S&P Global Composite PMI Flash NOV, UMichigan Consumer Sentiment Final NOV
