Gold prices (XAUUSD), are under intense pressure this morning as the US Dollar reaches a multi-week high, and is a whisker away from a new yearly record. Gold prices need to turn higher from current levels or face the risk of triggering a significant head and shoulders pattern, that could take gold prices as low as 1415.55.
The demand for gold and silver has declined in the last few weeks as the Federal Reserve are hesitant to reduce interest rates further, while stock markets have held up relatively well, despite weak economic data over the last few weeks. Also boosting the dollar and weakening gold are central banks across the world, rushing to reduce interest rates to avoid an economic slowdown, and as a side effect, it has strengthened the dollar.
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Technically, gold prices are forming one of the most famous technical analysis patterns, the head and shoulders top, and it is a pattern that is today suggesting that gold prices could decline to $1415.55 on a break to the September 10 low of $1483.61. The pattern is formed as gold prices repeatedly attempted to trade higher but failed as investors use the prices surges to offload their holdings.
The pattern is made up of the right and left shoulders, the August 13 and September 24 highs respectively, and the head, the September 4 high. The neckline is formed by drawing a trendline via the August 13 and September 10 lows. By subtracting the difference between the head and the neckline from the potential breakdown point of $1486, we can derive the target of the pattern.
Combining the neckline with a horizontal level tends to yield better projections, and until the price breaks below the September 10 low at $1483.60, the pattern will not be active, and gold prices could bounce. The only issue is that silver prices are about to turn bearish and could drag gold prices lower. For more on silver prices check out: XAGUSD: Strong USD at Risk of Toppling Silver Prices Uptrend.