Technical Analysis

Gold Extends Slide As US Dollar, Equities Stay Aloft On US Tax Reform Anticipation

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As the US dollar and equity markets on Tuesday continued to stay supported on anticipation of impending tax reform in the US, both market volatility and safe-haven demand continued to contract. This contraction could clearly be seen in the price of gold, which extended its slide of the past week as the rebounding dollar attempted to push higher.

Though tax reform is not yet a done deal, as the House of Representatives must pass its own bill and then come up with a final tax plan in conjunction with the Senate’s, the passing of the Senate bill over the weekend was a major step that has provided US markets with a significant boost of confidence. And while Monday saw a sharp fall in primarily technology stocks, a substantial rebound occurred on Tuesday as both equities and the dollar remained mostly bullish on the anticipation of corporate tax cuts.

As a dollar-denominated, safe-haven asset, gold continued to suffer on Tuesday due to the dollar’s rebound as well as low risk-aversion in the markets. Also helping to pressure the non-yielding precious metal was anticipation of a potentially impending interest rate hike from the US Federal Reserve next week. Markets are almost unanimously expecting another 25-basis-point rate increase at that time.

From a technical perspective, gold has spent the past week retreating from major resistance around the key $1300 price area. In the process, the price of gold has dropped below both its 50-day and 200-day moving averages to hit critical support lows around $1260 as of Tuesday. With any further progress on US tax reform in Congress, the dollar and US equities are likely to see an extended surge, which would weigh further on gold. In the event of a break below the noted $1260-area support, the next immediate target to the downside is around the $1250 support level. With any further breakdown below $1250, price could then begin targeting key downside support around the $1200 psychological level.

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