The technicals for gold do not appear favourable at the moment, as the yellow-metal struggles to reclaim the $1,900 level and rally on positive news. Yesterday, gold received a modest bid after Federal Reserve Chair talked down any chance of near-term tapering but failed to breakout to the upside.
Historically, gold prices start to rise when Federal Reserve Chair Jerome Powell reinforces his super easy monetary policy. This underscores the conundrum that gold traders currently find themselves regarding the bearish price action surrounding the metal in the short-term.
The biggest fear for gold traders at the moment is rising bond yields, and optimism over the recently announced $1.9 trillion COVID-19 aid package from Joe Biden, which has yet to be passed into law. However, if the package is agreed and reaches the real economy, then green shoots could be seen inside the American economy.
Further complicating the picture for gold prices is weakening US jobs data. Yesterday, weekly US jobless claims saw a considerable uptick, further raising the prospect of more support from the Federal Reserve, and the speed of incoming stimulus from the Biden administration.
Non-yielding gold is often seen as a perfect hedge against rising inflation, which often comes after massive stimulus. This is one of the many reasons why gold rallied in 2020, when the Federal Reserve announced QE4, and the Trump administration started to give out free paychecks.
In the near-term, seasonal factors may help lessen the ongoing price drop in gold. Gold typically fares well in mid-January due to Chinese new year, where many Chinese purchase physical gold during this time.
Many Chinese are also becoming more sophisticated in investing and choosing Bitcoin instead of gold. The Chinese government has recently been on a massive push to educate the public about digital assets as the economy moves towards rolling out a digital yuan currency. Whether this will affect the popularity of gold during the holiday season remains to be seen.
We do know that the technicals towards gold are bearish in the short-term, and particularly while the price trades under the $1,900 level. The long-term charts look especially bullish, although the short-term charts still show the possibility of more downside.
Gold Short-term Technical Analysis
The four-hour time frame shows that gold is trapped within a falling price channel between the $1,900 and $1,705 levels. The early year move towards the $1,960 level appears to have been a false breakout from the falling price channel.
All the time that gold trades below the $1,900 level then the prospect of a further decline towards the bottom of the mentioned price channel remains a real possibility.
Source by ActivTrader.
In terms of strategy, traders could wait for a retest of the $1,900 level to sell the metal, or indeed position themselves for further weakness by selling a new low.
A bearish head and shoulders pattern is currently seen on the lower time frames. A move under the $1,827 level is currently required to activate the pattern, which is projecting a potential drop towards the $1,790 level.
Gold Medium-term Technical Analysis
The medium-term to long-term prospects for gold are outstanding, due to the presence of a large cup and handle pattern across the daily and weekly time frames.
Gold is currently under the neckline of the pattern while the price trades below the $1,920 level. This could mean that the yellow metal is currently in the process of carving out the handle to complete the cup and handle pattern.
Source by ActivTrader.
Consensus theory amongst technical analysis is that the handle should not be too deep, meaning that the pullback from the neckline of the pattern should not extend too far. A drop towards the $1,700 level would seem perfect to complete the structure of the bullish price pattern.