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Precious metals plunge on receding safe haven demand

Gold and silver have turned lower after relinquishing the gains made earlier in the session. The turnaround came as European stocks extended their gains with Germany’s DAX index hitting a fresh all-time high and UK’s FTSE closing in on the key 6900 barrier. Demand for the safe haven assets fell in part because fears receded over Greece where the new anti-austerity government appears to have dropped calls to write-off the country’s debt. Such has been the strength of the selling that even a much-weaker US dollar has been unable to provide the buck-denominated metals any support. Some would argue that because of the growth in speculative interest on both metals lately –as evidenced, for example, by increased inflows into gold- and silver-backed ETFs and also the rise in net long positions – the sell-off that we are witnessing today is hardly surprising. Speculators are likely to haven abandoned most of those bullish positions and this may show up in the CFTC data that will be published on Friday evening.

In addition to a fall in safe haven demand, gold and silver have probably also witnessed some technical selling, too. As we reported on Thursday and also the week before, gold has been creating a series of bearish-looking technical patterns of late. Today, the metal tried to break above the prior high at $1285 but the bulls could not hold their ground there, leading to a sharp sell-off as the sellers realised this was a false breakout. The metal has now broken below a short-term bullish trend line and so it has potentially paved the way for further losses. However, at the time of this writing, gold was trading around $1256 and was thus just a few bucks shy of the key support around $1250/5 area. As well as the 200-day SMA, this is where the 38.2% Fibonacci retracement level converges with prior support. Therefore there is a chance that support may hold here. But if the buyers do not show up here and gold breaks below here then it could potentially pave the way for a move down to the 61.8% Fibonacci retracement level at $1220/1.

Figure 1:

Source: FOREX.com.

 

Meanwhile silver has also fallen as we had expected it to last Tuesday when we pointed out a triple top reversal pattern. Although the grey metal initially found support from the $17.70 area, it then came under intense pressure around the $18.15 resistance level. The resulting sell-off led to an eventual break below the short-term bullish trend line and consequently the $17.70 support was taken out at the second attempt. Today, the bears have shown their presence upon retest of this key level. As a result, a new bearish trend has now been formed. Until and unless this bearish trend line is broken, the path of least resistance will remain to the downside. Going forward, traders should watch the $16.75 support closely. If this level also breaks down then silver could a move down towards the 61.8% Fibonacci support around $16.00 (not shown on the chart).

Figure 2:

Source: FOREX.com.


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