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Does Gold Bugs Capitulation Mean a Reversal Is Imminent?

Published 10/02/2023, 08:12 AM
Updated 03/21/2024, 07:45 AM
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Gold lost almost 4% last week, the biggest drop in over two years. The price of a troy ounce fell below $1835, its lowest level since March. Gold's sell-off last week looked like a capitulation of the bulls, with a break of multi-month support. This could soon be followed by increased volatility with new lows. It is often at times like this that market inflection points are formed.
Gold lost almost 4% last week

Last week, gold accelerated its decline by breaking the support of the downtrend channel of recent months. The last time gold traded at such a low was over six months ago, when the US regional banking crisis triggered an influx of buyers, pushing the price away from support around $1810.

Then, as now, the pressure on gold came from rising US government bond yields and a reassessment of expectations for higher long-term interest rates.  In our view, the key difference in market sentiment is that a sell-off in gold accompanied last week's sharp rise in cryptocurrencies.

In the short term, gold is oversold, creating the potential for a corrective bounce. On the daily chart, the RSI oscillator has dropped to 21.6. The last time the indicator recorded such low levels was in June and August 2018, when a reversal from decline to growth was forming in gold for the following years.

It may well be that this acceleration in gold's decline is a sign that the fall is nearing its end, but it is still a case where it is better to be a little late to the rally than to buy in.

After falling below $1890, gold has been in thin air territory since March with no significant support levels. The nearest support remains at $1810. Around this level, gold found buyers with deep pockets in March.
Gold nears 200-week MA

Not far from this level is the 200-week moving average. This is an essential indicator of the ultra-long-term trend. Over the past six years, gold has been bought on dips below this line, keeping it below 3.5%. This lower line of defense is not far from $1750.

If a further $80 drop from current levels is not appetizing enough for long-term buyers, a new bear market in gold will have to be established.

The FxPro Analyst Team

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