Gold is Overbought, May Drop 6%

Yesterday, gold returned to the headlines after making a new record high of $1,610.70, despite closing lower on the day. Today’s price action on gold futures for August delivery suspiciously tested $1,581 and rebounded back towards the $1,600 level. The fundamental factors that provided gold with its most recent strength are slightly changing. The U.S. debt deal will probably go down to the wire and a last second deal will probably be made. Inflation is still a global concern, but it could be peaking in the U.S. and China. The European debt crisis is still here and will be around for several years, but Greece might have some temporary positive news in the short-term. The biggest concern for gold bulls is that this recent rally has the highest amount of open interest of the year, and yet gold’s appreciation was somewhat limited.

Today’s chart (5-minute) shows that price action has tentatively broken above the 200 pd simple moving average, but has stalled at the 61.8% Fibonacci retracement level of yesterday’s high to low move. A bearish correction could occur if we see a daily close below $1,580.00. Downside targets would include $1,542.70, which is 50.0% retracement of the July low to the all-time high move. If bearishness accelerates further support could reside at $1,504.00.

The long-term outlook is still bullish for gold, but if does correct, it is too early to identify when to resume a bullish bias. If the precious metal reestablishes itself in record territory, we will cautiously consider scaling back in to long positions.

Edward J. Moya is the Chief Market Strategist for edmoya.com, an educational website for foreign exchange and commodity traders. He has over 15 years of investment industry experience in forex, stocks, options and futures. At edmoya.com, Mr. Moya writes daily currency and commodity analysis and has authored numerous articles on trading using both technical and fundamental analysis for major financial publications. He is a contributor of technical and fundamental analysis in currencies and commodities to SFO, Market News International, and Forex Factory.

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One comment on “Gold is Overbought, May Drop 6%
  1. Janess says:

    I bow down humbly in the presence of such gertanses.

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