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Gold Gap-and-Go Breakout: XAU Fresh Highs as Coronavirus Fear Spreads

Gold Gap-and-Go Breakout: XAU Fresh Highs as Coronavirus Fear Spreads

2020-02-24 15:00:00
James Stanley, Strategist
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Gold, GLD, XAU Price Action Analysis

  • Gold prices have broken out to a fresh seven-year-high.
  • With both Gold and USD rallying, risk aversion into safe-havens has been the primary driver behind the move.
  • Gold prices are overbought on hourly, four-hour, daily, weekly and monthly charts: Can buyers continue to push?

Gold Goes Bid to Seven-Year-High as Coronavirus Fears Spread

Until this week, it was almost as if US equities were unaware or, perhaps just didn’t care about the spread of Coronavirus through Asia. While the backdrop otherwise was fairly supportive, with US economic data remaining relatively ‘ok’ along with the expectation for the Fed to soften later this year, stock prices continued to rise – punching up to a fresh all-time-high on Thursday of last week.

But something shifted during the Thursday trading session – and I had discussed this in-depth in my webinar that afternoon. A quick rush of selling enveloped the S&P 500, and it appeared as though that hit came out of nowhere as there wasn’t an individual headline or driver to point to. Such observations can be worrying, as it becomes more obvious that something is lurking below-the-surface; and since then the risk aversion has only hastened as a series of negative reports this weekend indicate further spread of Coronavirus, sparking fears of a pandemic that may soon stretch globally.

Gold prices have remained bid for much of the past two weeks, and of recent, as that risk aversion theme has further priced-in to global markets, buyers have rushed to the bid to craft fresh seven-year-highs. This week’s open brought a gap into play as prices opened above the 1650 level, quickly catching a bit of resistance at the 1680 Fibonacci level. Buyers pushed forward around the European open, temporarily scaling above this price on the way to setting that fresh seven-year-high.

Gold Daily Price Chart

Gold Daily Price Chart

Chart prepared by James Stanley; Gold on Tradingview

Gold Prices and Confluent Cocktail of Bullish Drivers

I had looked at the long side of Gold as one of my top ideas for 2020, the primary root cause being the expectation for the FOMC to get more loose and passive this year. And while markets have ramped up expectations for cuts out of the FOMC, the bank hasn’t yet opened the door to any such moves. In Gold prices, it appears that fear and future expectations around the FOMC as a response to those fears is what’s doing most of the driving.

At this point, both Gold and the US Dollar are in rally-mode, and this goes along with the move in Treasuries as the 30-year has hit a record low yield while the 10-year isn’t far behind. This is a fairly clear indication of investors pushing into ‘safe-haven’ vehicles like Gold or US Treasuries; making the continued move of strength in equities all the more befuddling.

But now that equities are starting to show some of that pain, the source of strength in Gold and Treasuries makes more sense; investors are ducking for cover as a new, unknown variable of risk is permeating through global markets. This has helped to keep the long side of Gold as well-bid, accented by a series of breakouts already in 2020 trade as the yellow metal marches up to fresh seven-year-highs.

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At this point, a bit of resistance is playing in off of the 14.4% retracement of the long-term move in Gold prices, taken from the low set in 1999 and drawn up to the high in 2011. Notice how on the monthly chart below, RSI is in overbought territory, indicating just how aggressive this move has been as buyers have hurried into ‘safe haven’ assets like Gold.

Gold Monthly Price Chart

Gold Monthly Price Chart

Chart prepared by James Stanley; Gold on Tradingview

Gold Prices Near-Term

Gold prices are overbought by a number of metrics, with RSI above the 70 marker on hourly, four-hour, daily, weekly and monthly charts. The bigger question is whether this will matter throughout this week as fear has come into the equation in a rather pronounced manner.

This could allow for a continued topside bias, although traders would likely want to exercise a good deal of prudence in looking to work around the move given the overbought readings that are showing on most relevant Gold charts. This could keep the door open for continued breakout potential, looking for prints of fresh highs to continue running-higher. This approach would, at the least, allow for traders to place relatively tight risk protocols so that if the breakout doesn’t continue to run-higher, the trade could be abandoned with the goal of loss mitigation.

Alternatively, for traders that can check their FOMO (fear of missing out), there remains some unfilled gap on the chart from this week’s open, and that zone of unfilled gap can be assigned as potential support: That zone currently runs from the approximate 1643 (last week’s close) up to 1651 (this week’s open).

As of this writing, retail traders are heavily long Gold, which further denotes the need for patience until some form of pullback may come into play for trend-based strategies.

Gold BEARISH
Data provided by
of clients are net long. of clients are net short.
Change in Longs Shorts OI
Daily 7% 2% 6%
Weekly 7% 3% 6%
Current Retail Sentiment in Gold
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Gold Hourly Price Chart

Gold Hourly Price Chart

Chart prepared by James Stanley; Gold on Tradingview

--- Written by James Stanley, Strategist for DailyFX.com

Contact and follow James on Twitter: @JStanleyFX

DailyFX provides forex news and technical analysis on the trends that influence the global currency markets.

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