Here’s Why Gold Prices are About to Break-Out Lower

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Gold prices are down for the third straight day as the market digests the latest events on the vaccine, stronger US dollar, and the overall weakness of the stock market. The metal is down by 0.70% today and is trading at $1,857, which is close to the strong support at $1,848.

Gold falls as US dollar gains

The price of gold is falling today as the US dollar index and the S&P 500 VIX index rise. The two are up by 0.35% and 2.65%, respectively today, which is a sign that investors are worrying about the state of the economy.

This is partly because of the rising number of Covid cases in the United States. Yesterday, the country reported more than 172k cases, which is slightly below the all-time high of 181k. That happened as the number of deaths in the country reached more than 250k after rising by more than 1,923 yesterday.

Therefore, while there have been positive results on vaccines, analysts believe that the situation is getting out of hand. Indeed, according to The Guardian, a report by the White House said that the current mitigation efforts were still inadequate.

As such, analysts believe that more US states will be forced to implement new lockdowns to reduce the number of cases. Already, states like California and New Jersey have put in place such orders, which will have an impact on the economy.

Worse, congress has failed to implement a new stimulus for months. And, with the current political divisions, there is a likelihood that this will not happen any time soon. That’s because of the differing vision about the size of the package. The senate wants to pass a $500 billion while the White House and House of Representatives wants to pass a $1.8 trillion and $2.2 trillion, respectively.

In general, a stimulus is usually viewed as being positive for gold prices and stocks but negative for the US dollar.

At the same time, the USD usually has an inverse relationship to gold prices. In most cases, like today, a stronger dollar usually leads to weaker gold prices. There are two main reasons for this. First, gold is priced in dollars, which makes them have an opposite relationship. Second, a weaker dollar tends to lead to higher inflation. And, gold is a well-known hedge against inflation.

Cryptocurrencies also falling

In my report yesterday, I noted that the reason why gold was falling was because of rotation from the metal to cryptocurrencies. That was correct since the price of Bitcoin was at a three-year high.

Today, the reversal is happening. While gold prices are only down by 0.70%, Bitcoin prices have fallen by more than 3.70%. Similarly, Ethereum and Bitcoin Cash are lower by almost 2% today. This performance is mostly because of profit taking. Furthermore, the biggest digital currencies have risen by more than 300% since their YTD low in March.

Gold prices technical outlook

Daily chart view

On the chart below, we see that gold prices reached an all-time high of $2,072 in August. Since then, the price has been struggling, which led a low of $1,848 in September. Looking closely, the metal has also formed a descending triangle pattern that is shown in black. At the current price of $1,863, it is just a few points below this support.

Therefore, since a descending triangle is usually a bearish sign, the implication is that the price will possibly break-out lower in the next few weeks.

If this happens, the next level to watch will be $1,800, which is a psychological level. For this trade, the stop or invalidation point will be at $1,962, which is the highest point this month.

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Gold prices

Gold Hourly analysis

Turning to the hourly chart, we note that gold prices have been falling since Monday this week, when they reached a high of $1,900. Also, we see that the metal is forming a head and shoulders pattern, with the neckline being at the psychological level of $1,850. The price has also moved below the 50-day and 25-day moving averages.

Therefore, I predict that the price will continue falling, reach the neckline, and then bounce back to form the right shoulder. After this, it will possibly resume the downward trend.

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