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    Gold plunges on increased deflation, reduced Grexit risks

    Gold has fallen sharply today following a three-day countertrend move. Clearly, demand for the safe haven asset is simply not there, for if there was it would probably be trading much higher due to the growing concerns over Greece, the advances of the terrorist group IS (now in Libya) and the continued conflicts in Ukraine despite the ceasefire agreement there. If these sort of risks are unable to lend gold support, one would have to wonder what actually would? Of course, demand for gold and other assets to protect from the effects of inflation is understandably low or even non-existent at these deflationary times. And now even Britain is on the verge of falling into deflation after the CPI here dropped to just 0.3% year-on-year in January from 0.5% in December. If oil prices continue to remain weak then deflation will not only be a threat to the UK and Europe, but the US too. Thus demand for gold in this regard may remain weak across the major developed economies. Meanwhile if Greece and its creditors finally manage to agree on some sort of a deal before the troubled nation runs out of cash, it is likely that gold will lose even more speculative interest. Judging by the resilience of the stock market and today’s sell-off in gold, speculators are probably trimming their bets that Greece will leave the Eurozone.

    On the technical front, gold is continuing to trend lower as key support levels break down. We have been tracking gold’s decline closely (for example in our reports HERE, HERE, HERE and most recently 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 threatening to break the key 40 level and if it succeeds then it would more or less confirm that the momentum is bearish.  In terms of price action, gold has now broken below the recent range lows around $1216 to $1221. This is where the short-term 61.8% Fibonacci retracement level from the upswing in January met the 100-day moving average (~$1216). Now that it has taken out this support area it has potentially cleared the way for a move towards, and potentially beyond, the next 61.8% Fibonacci retracement at $1199/1200. This particular retracement level is derived from the up move after it formed a low in November.  On the upside, a potential break above $1220 resistance may lead to a rally towards the next resistance and the 50-day SMA at $1230.

     Figure 1:

    Source: FOREX.com

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