Gold is a touch higher today after getting a hammering on Friday when a stellar US employment report caused the dollar to surge and the buck-denominated asset to have its worst daily performance in over a year. Evidently, the metal has found support today first and foremost from profit-taking – due to the lack of US economic data – and secondly from increased risks of Greece exiting the Eurozone. If risks of the latter increases further, then so too will demand for safe havens. The historically low interest rates and the resulting currency devaluation that we are seeing across most developed economies makes gold an attractive choice as a safe haven asset, even if, unlike equities and bonds, it pays no interest or dividend, and costs money to store. However, today aside equities still remain in demand with the major indices trading at or near multi-year or record highs. Unless we see a corresponding correction in equities then gold may remain out of favour, possibly at least until it falls back towards the $1200 area.
Indeed, the path of least resistance for gold remains to the downside after the metal broke some key technical support levels on Friday. In fact, we have been tracking gold’s decline closely (for example in our reports HERE and HERE) ever since the RSI reached the overbought threshold of >70 in the second half of January . Once again the RSI correctly projected a downward move in gold, and the momentum indicator is still continuing to trend lower after it broke below its own trend line. The RSI is now just shy of the key 40 level and if it breaks below here too then it would more or less confirm that the bears are in total control of things. Meanwhile the 61.8% Fibonacci retracement level, this time of the downswing from the March 2014 at $1292/3, once again proved to be a key factor in determining direction. The false break above that Fibonacci level a few weeks ago caused the bulls to withdraw from the market and at the same time encouraged the sellers to step in.
As a result, several support levels have now been broken. One such level, $1255, was taken out on Friday, causing gold to post a large bearish-looking candle on its daily chart, with the metal also finishing the day below its 200-day SMA (~$1251). Although the 50-day SMA (~$1228/9) has managed to hold firm for now, we think this may only be a temporary obstacle en route to potentially the 61.8% Fibonacci retracement level of the last major upswing at just shy of $1200. Meanwhile on the upside, the broken support levels may now turn into resistance. This makes $1255 a particularly strong resistance level to watch. At this stage, only a daily close above Friday’s high (~$1268) would invalidate the bearish technical setup.