Gold forecast: precious metals take a plunge, but what’s next?

After a remarkable run to new all-time highs, gold has finally stumbled. At the time of writing, gold was down around 5% and silver was off by over 6.5%, both off their worst levels slightly.  This has been one of the biggest drops in years and comes after weeks of relentless gains that pushed both metals deep into overbought territories. Bullion touched a fresh record of $4,381 an ounce on Monday before retreating sharply from there, to drop to a low so far of $4,080. But what about the gold forecast? Has the metal topped out or is this merely a blip before the metal resumes higher again?

 

Gold analysis: Why has the metal fallen so sharply today?

 

It has been a day of heavy selling in the precious metals space, one that was always going to come one of these days given how prices were previously just sky rocketing. Some would argue what took it so long. But multiple factors have come together all at once - from hopes that the US and China will agree to extend the trade truce, reducing haven demand, to a rebound in US dollar and an overall positive risk appetite, as exemplified by the Japanese Nikkei index futures breaking above 50K overnight. With so much buying lately, investors have finally started to take profit after the record-breaking run, either willingly or otherwise. The impact of profit-taking and long-side liquidation has added some real selling pressure for a change after what was a one-way traffic. The big drop begs the question: Has gold topped out or is this just a long-overdue correction? I guess time will tell. Today, traders have been just selling – and not just gold but silver too – and will be asking questions later.

 

 

Gold’s extraordinary run comes to an end – at least for now

 

Gold’s rally in recent months has been nothing short of extraordinary, fuelled by falling yields, persistent central bank buying, and expectations of further monetary easing. Yet, markets rarely move in straight lines. The strengthening dollar has also played its part, making gold and other precious metals more expensive for international buyers.  Adding to the cooling tone, haven demand has softened as President Donald Trump and China’s Xi Jinping prepare for next week’s talks aimed at easing trade tensions.

 

But it is far too early to suggest that the broader bull trend has ended. While corrections are natural, it is worth pointing out that many investors missed out on the big rally. Soon, they may step in to buy the dip, which should keep the sell-off contained.

 

The US government shutdown has compounded uncertainty by delaying key economic data releases and halting the Commodity Futures Trading Commission’s weekly reports. These updates, which track hedge fund and money manager positions, are vital for gauging sentiment in gold and silver futures. Without them, traders risk overextending positions in either direction, potentially amplifying volatility in the short term.

 

Technical gold forecast: Correction or Continuation?

 

Technically, gold’s sharp reversal is very much reminiscent of the price action we saw on Friday, but nearly twice as bad. While Friday’s dip was bought late in the day and that momentum carried on until Monday, it remains to be seen how much further will gold have to fall this time, before the dip buyers step back in. One thing is clear now: we have some resistance levels to work with now. The former support area between $4180 to $4200 is now the most important resistance area to watch on the daily time frame. For as long as this area now holds, the short-term path of least resistance will be to the downside until we see the formation of a bullish reversal pattern.

 

 

A couple of support levels to watch include $4,100, $4,080 and $4,060 – levels that were either previously support or resistance, with the latter also converging with a bullish trend line. If we go below these levels, a dip back to the next major psychological level of $4,000 is likely.

 

Looking ahead, attention turns to Friday’s delayed US CPI report, expected to show a 0.4% rise in headline inflation. A softer print would bolster expectations of another Fed rate cut, but will that lend fresh support to gold once more? Despite today’s setback, the long-term gold forecast remains constructive. Structural drivers that include central bank accumulation to lower real yields and lingering geopolitical uncertainty, will likely continue to underpin demand.

 

 

 

 

-- Written by Fawad Razaqzada, Market Analyst

Follow Fawad on Twitter @Trader_F_R