Gold breached the downside of the downtrending price channel that had been containing price action for the better part of the month of September last week. Overnight it was hit especially hard as a wave of selling across the entire commodity sector flared up as traders ran away from anything remotely resembling risk trades. That selling sent gold down nearly $100 at one point. The volume of trade was especially heavy for those particular hours. However, the selling exhausted itself as some larger buyers swooped in (very possibly Asian Central Banks) and scooped up the metal that was being discarded by the hedge fund algorithms. The recovery basically brought the market back up to its closing level from last Friday creating a potential spike bottom on the chart.
If you note the first blue level of resistance drawn in on the chart that comes in just shy of the $1640 level. Gold will need to push through this level and stay above it to give the bears a bit of unease who have been very confident of late. If the bulls can take this hill, then they have a legitimate shot at seeing price run back up towards $1680, which was a level commensurate with a former “gap and go” on the daily price chart. That level should bring in some selling and could stall any upward motion barring any fresh fundamental news.
I am looking for and indeed would prefer to see, some sort of stability in the price. The last thing this market needs is another $100- $150 push higher right away. That might actually spook some of the would-be end users.
A come down in volatility with perhaps a smaller daily trading range is exactly what it needs to inspire some confidence on the part of the many end users who are wanting to stock up before the festival seasons. Extreme volatility can spook those guys and leave them on the sidelines. They will want to see that prices have indeed moved into a level that is going to hold and then they will feel more comfortable making larger purchases.
The other possibility that we will watch for is for another leg back down lower again, only this time on decreasing volume which would indicate a loss of appetite on the part of the bears to sell aggressively at these lower levels.
One does reach a point in these hedge fund driven markets where price overshoots both the upside and to the downside making the risk/reward of a given trade not particularly attractive. In this recent case, how much more downside risk do you think gold has compared to upside risk when price is down below $1550? If we were moving into a rising or higher interest rate environment, that would be one thing but we are going to remain mired in an ultra-low interest rate environment for the foreseeable future; one that I might add is highly conducive to owning gold since opportunity cost is lowered to hold the metal in that sort of environment. Besides, any solution being offered by the West to shore up its tottering economies is going to certainly contain measures designed to increase liquidity (debauch the currency by money creation). In that environment, gold’s risk will always be more to the upside than to the downside, again, especially after it has been battered down so severely.