Along with oil, gold is the most traded commodity in the world, which means that traders worldwide are closely watching its price. Since the gold price is often considered a gauge on fear and uncertainty in the financial markets, the metal is also often used by investors as a form of financial “insurance policy” or hedge against hidden risks elsewhere in the markets.
In the week from November 5 to November 11, gold continued its bearish trend, which cut about 2% from the commodity’s price. Friday saw the largest decline in that week, with gold losing 1.5% for the day. The precious metal has further demonstrated a poor performance starting with the first day of November, which put an end to the sideways trend with bullish accents that could be seen on the charts between August and late October. Is gold set to rocket back to the 1300+ prices of may 2018? Some traders say yes, and they are watching the charts for what could be the most significant investment of the year.
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Why is gold declining in November?
The main driver behind the downward movement at the end of last week was the US dollar, which, following the Fed’s Federal Open Market Committee (FOMC) meeting, demonstrated significant strength against a basket of other major world currencies amidst increased expectations that the US central bank would continue to raise interest rates.
In its statement, the Fed outlined its commitment to previously announced plans aimed at bringing interest rates to a neutral level, as the US economy continues to show high growth rates, while inflationary pressure remains within anticipated levels.
Gold has traditionally been quite sensitive to moves made by the Fed, as a further increase in interest rates will boost the US dollar and US government bond yields, which reduces the attractiveness of gold as an investment option. Therefore, it’s important that traders are aware of this inverse relationship, which involves two of the most traded assets in the world.
Will the downtrend continue?
At the time of writing, gold is trading at roughly $1,200 and is now inches away of breaking the support level at $1,200, which has been untouched for more than a month. However, in order to consolidate its bearish trend, gold has to be put under further pressure by the US dollar.
The plans announced by the Fed last week increases the importance of the consumer price index numbers, given that this is one of the key indicators that the central bank looks at when deciding on changes in interest rates. Other US macroeconomic indicators expected that the following weeks should also be watched closely by anyone interested in where both gold and the US dollar may be headed.
The Fed has already raised interest rates three times this year and intends to stay ahead of the curve in 2019 to keep up with the strong growth in the US economy seen this year. Raising rates usually strengthens the dollar, which, as mentioned, generally trades inversely to gold. This obviously also puts the longer-term price of gold into question by adding heavy pressure on the yellow metal.
What do technical indicators say?
From a technical analysis perspective, gold also looks weak over the short-term, which could be a good signal for short-sellers. Even though the MACD and Stochastic indicators are currently in “oversold” territory, the overall downtrend, coupled with negative fundamental drivers, may still be able to push the metal further down.
Other indicators, including the moving averages and Bollinger bands, support the bearish sentiment and adds further pressure on gold prices going forward.
On the 4-hour chart, gold’s price action has formed an interesting divergence with the Stochastic indicator, which could mean that the bears are getting exhausted and a price reversal to the upside is about to come.
In addition, the price has been trading close to the lower end of the Bollinger Bands indicator for a while, which would also suggest that the downtrend might indeed end, at least for now.
Thus, on the one hand, we have the fundamentals saying gold is poised to continue lower due to the high pressure from a stronger US dollar, and on the other hand, we have a few technical indicators that hint to a bullish trend reversal.
Again, a divergence between Stochastic and the price action is not the most reliable bullish signal in the world, so traders should look at it as a hint only. The rest of the indicators, especially the trend indicators, resonate with the fundamentals, suggesting a continuation of the bearish movement.
From our point of view, the best-case scenario for gold buyers is a sideways trend that might continue to go on for days or even weeks from here, after which the price action may dip again, probably testing the support level around $1,186. However, bulls should still pay attention to this exciting market. As history has shown us, gold is always ready to spike at the first sign of any weakness from major currencies and economies around the world. To simplify all of this, gold prices are low, and history shows that it never stays that way. If you're not in a hurry, now might well be the best time to buy gold, but you might have to wait a while until it bounces back.
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