Market Overview

Strong profit-taking in gold or the beginning of a reversal?

Gold is under pressure this week, having pulled back to the $2300 per troy ounce level. The decline since Friday’s close is over 3.7%. The formal trigger is a more moderate escalation in the Palestinian-Israeli conflict than expected at the beginning of the month. However, we view the current pullback as a welcome technical correction that could develop into a bear market.

Last Friday, the price of a troy ounce of gold on the spot market broke the $2400 mark for the second time in history. And once again, there was strong resistance at this round level. Since the beginning of the week, we have seen systematic intraday selling of gold and silver, not related to the stock market or currencies. That is, traders focus on this idea, ignoring global fluctuations in risk demand.

In a correction, the price has already now pulled back below the 76.4% intermediate retracement level of the rally from the February lows to the April peak. This is an important signal of a more global shakeout, as we recently saw such a shallow correction in March in a more obvious bull market.

The downside amplitude over these two days, which is the largest in the last two years, cannot be ignored.

On the daily timeframes, the RSI has pulled back sharply from the overbought area, also indicating an active downward move. Earlier, we noted a divergence between this indicator and the price, where two RSI touches of the 85 level were at $2100 and $2350. This was an important precursor to the decline, the development of which we are now seeing.

Nevertheless, the positive scenario remains valid as long as the price is above $2360, where the 61.8% Fibonacci retracement level lies. We assume that gold is capable of returning to the upside after a technical shakeout.

A sell-off in gold over the next couple of days could quickly take the price to $2360. A dip below would be an important first signal of a true reversal. The ability to go below $2185-2200 within a couple of weeks would raise the question of a long-term trend reversal with a potential downside target before the end of the year at $1900.

The FxPro Analyst Team

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