Gold Price Outlook:
- Gold prices put in a strong start to April trade after an outsized sell-off in mid-March.
- Gold prices rallied by more than 7.7% from the April 1st low into yesterday’s high.
- The 1700 level looms large, and bulls were unable to do much beyond that resistance last month. Will another test there bring bears back into play? Or is the yellow metal primed to surge to fresh seven-year-highs?
Gold Goes Bid After March Sell-Off
Last month was an eventful one across global markets, similar to March of 2008 when Bear Sterns went bankrupt, or September of 2008 when the same happened to Lehman brothers. This time, however, the driver was of a more unknown origin as the novel coronavirus continued to spread through the United States. It may be hard to believe now with a bit of perspective, but it was only March 1st when the first case was identified in New York and, troublingly, a few days later in an attorney from New Rochelle (just north of the city) who hadn’t traveled outside of the US; indicating that community spread had already begun.
As this was developing, fear drove the bid in Gold prices as the yellow metal surged by as much as 8.8% from March 1st into the highs on March 9th; but at that point an entirely different them took over as extreme risk aversion showed across global markets, and many assets were hit, including Gold.
So, while Gold is often considered a ‘safe haven’ asset – it’s also shown a tendency to sell-off in times of extreme stress as deflationary fears enter the equation. Between March and October of 2008 – Gold prices dropped by as much as 34%. Last month – Gold prices were hit to the tune of 15% before finding some support at a key area on the chart.
Gold Daily Price Chart
Chart prepared by James Stanley; Gold on Tradingview
Gold Prices – Bigger Picture
As looked at last week, Gold prices put in a long-legged doji during the month of March, highlighting the potential for extreme volatility or a potentially outsized break out or break down given the read of extreme indecision. And given the 8.8% pop in the first week of April trade, it looks like that theme may be closer to playing out.
Taking a step back on the Gold price chart and a directional bias begins to show, marked by last year’s aggressively bullish run that started in Q4 of 2018, just as US equities were getting hammered as the Fed appeared to be much more hawkish than what markets were looking for. As the Fed shuffled into a more dovish stance last year, moving from the four rate hikes in 2018 into a pattern of cuts – Gold prices popped, and continued to run, going overbought on a number of occasions as the yellow metal continued to rip.
That overbought backdrop showed up again in early-March after a strong breakout took place in February. That February breakout appeared to sync with the initial pricing-in of fears around coronavirus; but as the Fed moved into an emergency mode in mid-March, the deflationary fears reared their ugly head again as Gold gave up all of those breakout gains, and then some.
| Change in | Longs | Shorts | OI |
| Daily | 1% | 15% | 3% |
| Weekly | 24% | -32% | 10% |
But even the pullback, despite its size and scope of 15%, was moderated to a degree. Price action made a quick trip to a key area of support; and this is the same zone that had held the lows in November of last year before buyers showed up in December and January. This takes place around the 1450 level which is confluent with the 38.2% Fibonacci retracement of the post-Financial Collapse major move in Gold prices.
Gold Monthly Price Chart
Chart prepared by James Stanley; Gold on Tradingview
Gold Near-Term
After the mid-May swoon traders would rightfully be cautious of looking to trend strategies around Gold. Frankly, it can be difficult to project over the next couple of days much less the next few weeks or months.
Given current price action, bullish stances could remain as attractive, looking for continued governmental support as the economic destruction from near-global shutdowns remains in-force. The big fear, of course, would be a global recession or another shoe dropping on an item like European debt or, perhaps even Municipal bond debt in the United States. But should some element of support and relative calm remain in risk markets, the topside of Gold can remain as attractive.
At this point, Gold prices appear to be cauterizing some short-term support around an area of prior resistance, taken from the approximate 1640 area on the chart. This also lines up with the 76.4% retracement of the March sell-off, adding a bit of confluence to this current spot of support.
Above current price action – 1675 remains of interest, as does the big figure of 1700. If those levels can be taken out, the next obvious area of resistance potential comes in around 1750. On the support side of Gold, a longer-term Fibonacci level lurks around 1628; and below that is the 61.8% marker of the March pullback, which helped to build a bit of higher-low support ahead of last week’s close.
Gold Price Two-Hour Chart
Chart prepared by James Stanley; Gold on Tradingview
--- Written by James Stanley, Strategist for DailyFX.com
Contact and follow James on Twitter: @JStanleyFX
