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Gold Rally Cools Amid Impressive Resilience Of Stock Markets

05/08/20 04:25:05 PM
by Fawad Razaqzada

Gold goes in consolidation mode after recent sharp gains as investors await direction from stock markets and central banks, with the coronavirus lockdown measures easing a little in a few places.

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Despite the Covid-19 lockdown continuing to weigh on economic activity, US stock markets have remained stubbornly resilient, with the major indices pressing against last week's highs. The upward pressure on the dollar has also eased somewhat with investor sentiment improving somewhat on the prospects of the lockdowns being lifted in several countries, albeit slowly. Consequently, safe haven gold has been unable to extend its advance, although the weaker dollar has prevented it from falling more sharply. So, the precious metal remains not too far off its recent highs and ready to pop higher again in the event of a spike in risk aversion and given central banks' desire to keep yields depressed.

Indeed, the Bank of Japan has become the latest major central bank to highlight the lengths policymakers are willing to go in an effort to keep the global economy ticking over. The BoJ's Governor Haruhiko Kuroda recently said that "the spread of coronavirus is having a grave effect on our economy" and as such "even more proactive bond-buying is appropriate at present." The US Federal Reserve and the European Central Bank will be making their latest policy decisions soon. If these banks unexpectedly announce new policy measures to shore up their economies, and thus debase their currencies further, then gold stands ready to benefit. However, with lots of policy measures already announced, it is unlikely we will hear anything significant at these meetings.

Still, the Fed could include more explicit guidance about how long rates might stay low, or provide other minor tinkering in an effort to drive down longer-term yields. Should the yield on the 10-year US bonds hit a new low in the aftermath of the Fed's policy decision then don't be surprised if gold correspondingly hits a new high for the year.

Meanwhile, from a technical stand point, gold is residing in a consolidation pattern above the key $1700 level, which was previously resistance. The metal was holding its own above the 21-day exponential moving average and was comfortably above the 200-day simple average at the time of writing. So, price action was anything but bearish when this report was written. Yet the precious metal wasn't exactly rallying and it wasn't showing the same bullish characteristics like it has done previously. So, it was quite possible that gold was going to give back some further ground before finding new buyers.

Figure 1. Gold Daily Chart.
Graphic provided by: TradingView.
However, a more bullish scenario would be if the metal continues to hold above the key $1700 support level, eventually resulting in a bullish break from the triangle pattern in which it was consolidating. A break above the triangle resistance around $1735 is needed to ignite fresh buying momentum which could see the metal head toward the 127.2% Fibonacci extension level at $1771/2, before possibly challenging the $1800 handle next. Meanwhile a decisive daily close below $1700 could pave the way for a deeper retracement. The short-term bullish technical outlook would become invalidated in the event prices break the recent low at $1640. If that were to happen then a retracement to $1600 would become highly likely.

Fawad Razaqzada

Fawad Razaqzada is an experienced analyst and economist having been involved in the financial markets since 2010 working for leading global FX and CFD brokerages. Having graduated with a degree in economics and leveraging years of financial market experience, Fawad provides retail and professional traders worldwide with succinct fundamental & technical analysis. In addition, he also offers premium trade signals to subscribers, and trading education to help shorten the learning curves of developing traders. He has also been trading on his personal account for many years. Follow Fawad on twitter @Trader_F_R or visit his website at

Title: Financial Market Analyst
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