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Gold extends drop as risk appetite improves

Gold has fallen quite sharply at the start of this week after rallying to a sturdy area of resistance at the end of last week – more on this later. The yellow precious metal is driven lower by a combination of factors, not least the significantly stronger appetite for riskier assets due to raised hopes over a deal for Greece. After the Greek government blinked at the weekend, investors were hoping for a resolution as early as Monday which is why stocks surged higher and gold slumped. However, as it turned out, they delivered the economic reform proposals too late. The proposals also lacked sufficient detail and this made an agreement to unlock the €7.2 billion of aid impossible. However, the proposals were seen as a positive step that could lead to an eventually agreement later this week. As well as stocks, European government bond prices are also rising which is putting downward pressure on yields and in turn the euro. Consequently, the EUR/USD has given up much of the gains made over the past couple of weeks and not even the strong euro zone PMIs or the weak US Durable Goods Orders able to support it on Tuesday.  This has effectively underpinned the dollar index and in turn undermined some buck-denominated commodities, including gold and silver. Further losses seem likely now for gold, although that being said precious metals look a little bit oversold now while Greece could still default and exit the euro zone – an outcome that would undoubtedly boost the appeal of safe havens. 

From a technical point of view, gold’s pullback should not have come as a surprise. As we reported on Friday, the metal had rallied into a strong area of resistance around $1205 where several technical factors converged so we noted then that a potential pullback from there was likely. As well as this area being previously resistance, the 200-day moving average and the 61.8% Fibonacci retracement level of the last downswing all converged there.  As it turned out, gold has dropped significantly from there, taking out the $1190 support in the process. In fact gold has even dipped below the long-term pivotal level of $1180. Thus, the path of least resistance continues to remain south. The next logical level of support is around $1165/70 which corresponds with a short-term bullish trend line. Thereafter are this month’s low at $1163 and then the long-term 61.8% Fibonacci retracement level at just below $1155.

It is important to remain objective as gold heads lower because there is always the possibility that it may have already formed a bottom. Indeed, price has already created a few “higher lows” and until it created another lower low then one cannot rule out the possibility for a sharp rally at some point in the near future. But in the near term, for as long as price remains below the abovementioned $1205 resistance area, we would maintain our bearish outlook. If and when $1205 and the bearish trend are taken out then the next hurdle is the May high at $1332/3.

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