Gold’s rally appears to be running out of steam after a 2% rally since the beginning of last week.
Gold has been at the mercy of sellers for a month since the 20th, losing over 5.2% from peak to trough. Gold began to look oversold in the short term after falling below $1885.
The price fell below the 50-day and then the 200-day moving averages in August. The rally in recent days has brought the price back above the long moving average, but the short moving average is effectively acting as resistance. The last time we saw this dynamic was in May last year, followed by five months of declines before a reversal to the upside.
The situation could repeat itself this time around. At the end of last week, the rally slowed considerably, and since the start of the day on Tuesday, gold is down 0.2%, having fallen to $1915 an ounce in the spot market.
The rally since the beginning of last week fits into the Fibonacci retracement pattern, having lost upward momentum as it approached the 61.8% level of the initial decline.
Confidence in gold’s further decline will be boosted by a quick return below the 200-day average, now above $1910. The final confirmation of this pattern would be a return to August’s local lows at $1885, opening the way to $1820.
Separately, it is worth noting that gold has temporarily returned to a direct correlation with the equity market. In contrast, in the spring of this year and last, it was the other way round: equity sell-offs were accompanied by frenzied gold buying.
Last year, it was geopolitics, and this spring, it was fears about bank capital retention. The latter has fallen off the radar but is hardly exhausted, and it would not be surprising to see it back on the front pages of the financial press in September-October. This could be an essential pivot point for growth for gold, but no earlier.
