Gold Price Prediction: After the Drop, What Now for Bullion？

Gold’s rapid rise suffered a sudden and sharp reversal this week. Having peaked at record highs over $4,381 per ounce, the metal fell by more than 5% in a single session, on October 21st, when investors rushed to book profits and a stronger dollar diminished some of its safe haven appeal.

The sharp jump in volatility at the highs over the past week is flashing caution and may encourage at least short-term profit-taking, — independent metals trader Tai Wong.”
Better risk appetite in the general marketplace early this week is bearish for the safe-haven metals,” said Jim Wyckoff — senior analyst at Kitco Metals.

The cause for the fall and what comes next is a combination of fundamental drivers, technical signals and changes in market sentiment.

Fundamentals

The underlying support for gold is still strong. Enthusiasm for rate-cutting by the Federal Reserve, continuing geopolitical tensions and further ongoing by central banks buying have all added to the momentum of the rally in recent months.

However, the latest events have chipped away at the upside thrust for gold. Perception of improved U.S. – China trade and less aggressive prospects for the dollar power has reduced the urgency for safe haven buying. According to the Reuters report:

Simmering of trade tensions between the U.S and China was the snowflake which caused the avalanche and reversal of gold’s momentum trade. — Matt Simpson, senior analyst at StoneX.

Technical Picture and What the Chart Is Telling Us

Looking from a chart point of view, gold has broken from a parabolic climb and entered a correction mode. Coming through key resistance areas at $4,211 – 4,274/oz and surging through $4,300, the metal was well due for profit-taking.

Immediate support now comes in clusters around $4,052 – 4,000/oz — this is an area previously defined by a consolidation base. A break below that would open the door for a deeper correction, whilst a strong bounce would be a confirmation of the underlying trend. Analysts have pointed to the complexity:

This is simply a technical repositioning on a market that clearly needed a pull-back after an extended move above $4,000. I suspect we’ve seen the worst of the day-to-day volatility as dips will still likely be bought. — said Simpson.

The RSI and momentum indicators had previously been screaming ‘over-bought’ prior to the drop off — suggesting that the correction was overdue. Granting the technical layers, two plausible scenarios come to mind:

Scenarios A — Consolidation and Re-bounce

Should gold find support area around the area of $4,000 plus, combined with a response from buyers, the metal will re-form and attempt another bounce back toward resistance, currently sitting at $4,211 – 4,274. Should momentum re-assert itself, previous highs and possibly higher are in focus.

Scenarios B — Support Giving Way and a Deepening Decline

Should the $4,000 support figure fall, then a deeper correction may evolve in which the price levels of something like $3,900 or lower are targeted — this especially is the dollar rises further, and in addition the safe-haven demand wanes or cut-rate expectations turned back down.

Outlook and Trading Highlights

Short-term (1- 4 week) it appears possible also that Scenario A has a greater chance. The fundamental of the rise is intact and worthy of a perhaps healthy correction rather than one of regret. To be noted is how price reacts in the vicinity of $4,000.

However, the possibility of Scenario B should not be overlooked. The rapidity of rise previously would increase the danger of decline should special triggers appear against gold.

Some key trigger points to note:

• A daily close below approximately $4,000 would increase percentage of chance of a deeper correction.
• A breakout above approximately $4,211 – 4,274 with high momentum would restore the uptrend.
• Some of the key macro triggers to watch are U.S inflation data, Fed comments, dollar index and surprises in trade or geopolitical directions.

Summary

Gold’s rapid falls this week does not mean that the death knell of the bull, but it does mean the death of the easy of rise. What is before gold is probably a chapter of consolidation and digestion. Traders and investors should accordingly view the next few days as a transitional condition, watching the technical area levels and macro triggers rather than chasing yesterday’s heights.

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