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Gold recovers as risk appetite wanes

Gold being the only real alternative to fiat currency was the obvious choice for market participants this morning, which rallied sharply off its overnight lows after “Grexit” fears made an unwelcome return to the markets and dampened the appetite for risk. The yellow precious metal had been making the headlines for all the wrong reasons up until today and now could be the time for it to shine and stage a comeback rally. That said, a lot will depend on the performance of the equity markets which, despite today’s sell-off, continue to remain investors’ favourite choice of asset classes in this era of ultra-low interest rates. But if the stock markets now stage a correction then gold could be one of the main beneficiaries in the short term as it is heavily oversold.  Admittedly, the lack of inflation across the globe and the US dollar’s strength, among other factors, mean the potential gains for the metal could be short-lived however.  Nevertheless, any sort of a comeback would be most welcomed by the bullish camp.

Gold’s recovery today can also be explained by technical reasons. As can be seen on the chart, gold has reached the support trend of its bearish channel and the 61.8% Fibonacci retracement level of the upswing from the 2008 low, at $1155. This is a key support level, make no mistake about it. If the price of gold continues to hold above here then we may see a more profound recovery, at least towards the resistance trend of the channel around $1190 or even $1200, before gold makes its next move. But to get to those levels it will have to climb back above the broken support level of $1170 soon. Once this is achieved then we can be more confident about the direction of the near-term trend.  The small bullish divergence on the RSI is also pointing to a potential rally.

If however the rally falters around the $1170 handle then the aforementioned support at $1155 could be taken out at the second time of asking. That could lead to a continuation of the selling towards the November low of $1131.5 over the coming days or weeks.  

Figure 1:

Source: FOREX.com


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