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Gold Price Breaks Lower as Risk Aversion Spikes and Volatility Soars

Gold Price Breaks Lower as Risk Aversion Spikes and Volatility Soars

Peter Hanks, Strategist

Gold Price Outlook:

  • Gold fell roughly -2.5% Monday morning as markets awoke to a surge in volatility
  • As a result, gold prices fell outside their recent technical pattern, with little support beneath
  • While the longer-term outlook remains constructive, bulls may have to weather further turbulence

Gold Price Breaks Lower as Risk Aversion Spikes and Volatility Soars

Gold fell beneath $1,900 an ounce for the first time since August 12 on Monday, erasing a key technical pattern and opening the door to further losses in the process. Typically considered a safe haven asset, a sudden surge in volatility across various markets saw the yellow metal trade in lockstep with risk assets, possibly suggesting some traders had to liquidate gold positions in order to fulfil other trading obligations. Similar price action was witnessed in February at the height of the covid selloff.

Gold (XAU/USD) Price Chart: 4 – Hour Time Frame (June 2020 - September 2020)

gold price chart

On the back of Monday’s breakdown, gold has fallen out of the wedge it established since early August which may lead to increased volatility in the days ahead as traders capitalize on the lack of nearby barriers. To that end, the next technical level of note on the supportive side is likely $1,862 which coincides with the metal’s August swing low. Further losses could mount an attack on the level, which, if breached, could see gold extend lower still.

View our Podcast Episode on Risk Trading and Safe Havens

To the topside, resistance may reside at the point of prior support – most notably around $1,920. That said, gold looks vulnerable at this stage with the abrupt shift in risk appetite and broken technical structure. Therefore, the shorter-term outlook for the precious metal has surely taken a hit but I would argue the longer-term fundamental drivers behind the broader rally remain largely intact.

Thus, some gold-believers might view recent price action as a period of consolidation before an eventual continuation higher in the months to come. To that end, an extension lower could materially change the risk-reward profile of the commodity from a trading perspective. In the meantime, follow @PeterHanksFX on Twitter for updates and analysis.

--Written by Peter Hanks, Strategist for DailyFX.com

Contact and follow Peter on Twitter @PeterHanksFX

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

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