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Is this the start of a new downtrend for gold?

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NEW YORK - JANUARY 9: Gold bullion bars and coins are seen for sale at Manfra, Tordella and Brookes, Inc. January 9, 2003 in New York City. The price of gold has risen by nearly 30 percent over the past year with investors looking for stability as war with Iraq has become more likely. (Photo by Mario Tama/Getty Images)

 Is this the start of a new downtrend for gold, or a pause before the longer-term uptrend is resumed?

As safe haven asset appeal has diminished in the last week or so, so has the price of dollar-denominated gold. The move sees the precious metal trading back below the psychological $1500 and ounce level, beckoning the question: is this the start of a new downtrend for gold, or a pause before the longer-term uptrend is resumed?

Technical view

The gold daily price chart, below, highlights most of the trading activity for 2019. The red, green and blue lines on the chart represent the 20-, 50- and 200-day moving averages (MAs) – labelled 20MA, 50MA and 200MA respectively. The 20MA, trading above the 50MA, which trades above the 200MA, suggests that the short-, medium- and long-term trend bias remains up.

However, the gold price has recently crossed under the 20MA to find support on the 50MA. In the current context, this suggests that the short-term pullback may just be a short-term correction of a longer-term uptrend.

The short-term correction has moved the price into oversold territory. The oversold signal indicates that the correction may be nearing an end and that the price may now be setting up for renewed gains.

The correction in gold has also moved the price to a confluence of both trend line and horizontal support at the $1480/oz level. Traders will be hoping for a bullish price reversal and a move out of oversold territory for a buy signal in line with the longer-term uptrend.

In this scenario $1555/oz would be the initial target from the trade, while a close below the reversal low might be used as a stop-loss consideration.

IG client sentiment on gold

At the time of writing (11 September 2019) 69 per cent of IG clients with open positions on gold expected the price to rise, while 31 per cent of IG clients with open positions expected gold to fall.

Summary

  • Gold has corrected from near term highs to trade back below the $1500/oz mark
  • The correction has moved gold into oversold territory
  • The oversold signal suggests that the short term correction may be capitulating and that could be setting up to renew gains
  • The longer-term trend bias for gold remains up
  • Traders might consider a move out of oversold territory a long entry signal in line with the prevailing uptrend
  • In this scenario, $1555 becomes the initial upside target, while a close below the reversal low may be used as a stop-loss consideration
  • 69 per cent of IG clients with open positions on gold expect the price to rise