Gold has finally responded to the falling equity markets rather than the volatility in the dollar at the start of this year, possibly reviving its role a safe haven asset. However, it is early days still and the lack of a more significant rally makes me wonder whether this latest rise will prove to be another ‘dead-cat’ bounce. Global stock markets have fallen sharply at the start of this year and although Wall Street staged a mini recovery late in the day on Monday, US index futures have turned lower once again, tracking the renewed selling pressure in Europe. No one seems to be too sure why the markets have dropped this viciously. Undoubtedly, concerns about an economic slowdown in China is a big worry for investors following the release of a weaker manufacturing survey on Monday and the resulting sell-off which triggered a trading halt. Another, albeit less-talked-about, reason behind the equity market sell-off could be the withdrawal of bids from traders who had positioned themselves for a Santa Rally in December but were ultimately left disappointed.
The US currency meanwhile may have 99 problems but a rally ain’t one: the Dollar Index is currently above the 99 handle and is fast approaching the psychologically-important 100 mark. The greenback is rallying against almost all major currencies, except the yen. Bizarrely there is no corresponding safe haven flows into the Swiss franc. Yet despite a stronger dollar and weaker EUR/USD exchange rate, gold is up for a second consecutive day.
It remains to be seen how much longer could gold resist the rising dollar; if this week’s US macro data point to an improvement in the world’s largest economy, stocks could bounce back and rise along with the dollar, reducing the need for safe havens. Indeed, so far this week, gold’s rally has not been as strong as the sell-off in the equity markets, suggesting that when stocks eventually find a base, the metal could drop sharply, now that the dollar is also looking strong once more. However if this week’s US data disappoints badly then traders may revise downwards their expectations about future rate cuts. This would most likely boost the appeal of gold on a relative basis, especially if stocks continue to fall.
From a technical perspective, gold now needs a decisive break above the key $1080 resistance level in order to support the bullish argument. At the time of this writing, the precious metal was testing this key level. Should it break above here, preferably on a closing basis, then a rally towards the next potential resistance area of $1098-$1102 would be highly likely. As well as previous support, this is where the 38.2% Fibonacci retracement level of the most recent downswing comes into play. Beyond here, the next stop could be around the 61.8% Fibonacci level at $1136, followed by the 200-day moving average, currently at $1140, or even the 78.6% retracement at $1160 – the latter also ties in with a long-term bearish trend line, making it a significant resistance should we get there.
Another failure to break decisively above $1080 would be a bearish outcome for gold. Even more bearish would be a potential breakdown of support at $1060. Should that happen, gold could easily revisit and maybe even break its 2015 low of $1046 that was hit in early December.