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Gold Price at Dynamic Support But More Downside Possible

Gold Prices

Gold price continues to trade with a bearish tone despite finding dynamic support right above the apex of a previous contracting triangle. The safe-haven asset seems to have “lost its mojo” lately. Unable to hold above the $2,000 level, it dropped on the news that efficient vaccines are on the table.

However, one should take these short-term market reactions as nothing but the expression of investors’ quick reaction to the news. If we look back in time, we see that the gold price began to rise well before the COVID-19 pandemic. More precisely, gold broke higher in the summer of 2019, and it did not stop until it reached a new all-time high above $2,000 during the pandemic. The key here – it broke higher six months before the pandemic.

Therefore, those investors that bought gold when there was no trouble in paradise are different than those that bought gold during the pandemic. The first category bought it to obtain diversification benefits in the case of an economic recession. However, investors in the second category bought it to speculate on the length of the pandemic.

The vaccine news cut short the length of the pandemic and, with that, the length of the crisis. Hence, the gold price correction is understandable. The big question now, though – how low can gold price go and when it is the time to go long again?

Gold Diverging From Bitcoin

The recent move lower in gold and the bearish price action came at a strange moment. Most of the time during the 2020 crisis, gold and Bitcoin moved in a synchronized, direct correlation.

However, that changed lately. More precisely, the last few weeks, Bitcoin marches higher every day, with some $1,000 rallies daily. Gold, on the other hand, tanked.

When such divergences form, investors wonder what asset is “right”. What to do – to buy gold as it will follow Bitcoin eventually, or to sell Bitcoin, as it is disconnected from reality?

US Treasury Taking Stimulus Off the Table

Yesterday the US Treasury announced that it is taking some stimulus of the table. The famous Mnuchin-Powell cooperation ended abruptly.

It makes one wonder why this comes after the US elections and why did the focus shift from more stimulus discussions to stimulus withdrawal. Obviously, it has to do with the US elections outcome, as the new administration will come with a new Treasury Secretary.

Nevertheless, the move puts pressure on the Fed. While the programs that are withdrawn are not that important in size, they do matter from a symbolic point of view. If the markets perceive, even for a second, that financial conditions in the United States contract, then the rush to the USD will intensify.

Gold Price Technical Analysis

The chart below shows much about gold’s troubles lately. Despite the move lower, it has not yet reached the apex of the previous contracting triangle. Such a triangle usually forms at the end of complex corrections. When it does so, the apex provides strong support or resistance.

It already provided support. We do not need to wait for the price to come exactly to the horizontal support level, but we can use the area as the one that stopped the decline for now.

However, technical analysts consider a support or resistance level to weaken the more the price tests it. In this case, this is the third attempt that the gold price makes at the horizontal level. Effectively, it suggests that the support weakens and that another leg lower is in the cards.

To trade it, bears may want to short at the market. By doing that, there are two different ways to approach the short trade. One is to place a stop-loss order at $1,900 – the highest point in the recent swing higher. This way, the risk-reward ratio exceeds 1:2 when targeting the measured move of the triangle that formed at the $2,000 level.

Another one is to place the stop at $1,950, just to make sure that no market swing takes the shorts out. If that is the case, the risk-reward ratio is much smaller, and some traders may decide to skip such an approach.

To sum up, look for a move below the apex to trigger more downside.

Gold Price Forecast