Gold remains pressured despite weak dollar

April 5, 2016

Gold continued to be weighed down along with other major commodities on Monday despite persisting weakness in the US dollar and lowered expectations for further Fed rate hikes.

Since a 13-month high around $1280 was reached just over three weeks ago in mid-March, the price of gold has fallen in a series of lower highs and lower lows. This steady retreat has occurred even as the US dollar has also steadily lost ground during the same period due to progressively diminishing anticipation of additional US monetary policy tightening in the near-term. Since gold is denominated in dollars and is a non-interest-bearing asset, conventional wisdom would suggest the opposite – low interest rates and a falling dollar should lead to a boost for gold.

However, another characteristic of gold – that it is considered a safe haven asset in times of market turmoil and volatility – has helped to place some pressure on gold prices for the past several weeks. Specifically, US stock markets have been in a prolonged rally, sharply reversing the heavy losses incurred during the early part of the year. This has helped to decrease the attractiveness of gold as a safe haven.

Technically, during the course of gold’s decline within the past three weeks, price has broken down below several factors that have helped define its recent steep uptrend. These include both an uptrend line extending back to January lows as well as the key 50-day moving average.

If gold has indeed formed an intermediate top, any continued strength in equity markets could lead to a further loss in value for the precious metal. In this event, the next major target below the $1200 psychological level is at key $1190 support. With any continued downside momentum, further bearish support targets reside at $1170, followed by $1140, where the 200-day moving average is currently situated.

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