Gold prices have had a tough week to say the least. Prices started the week off on the wrong foot and were never able to recover. This past week has seen gold dip from the $1395 area to as low as the $1304 area. The bulls have lost the momentum-at least for now.
At the beginning of the week it certainly seemed clear that the odds of a U.S. strike against the Syrian regime were diminishing-at least in the short run. Russia has stepped in with a plan to obtain Syria’s chemical weapons. Secretary of State John Kerry is currently in Switzerland discussing the issue with his counterpart Sergey Lavrov. Russia and the U.S. will be meeting later this month to discuss a diplomatic solution to the crises.
The phrase “Diplomatic solution” has apparently triggered selling in the precious metals complex as the likelihood of an attack has diminished significantly. It goes without saying that yes-this situation could turn on a dime, but for now the geopolitical landscape is very calm compared to what it was a week or so ago.
This has led to an increase in risk appetite, as we have seen stocks rally sharply this week. In the current environment, higher risk appetite has been a negative for precious metals prices, and that correlation does not appear to be changing anytime soon.
Gold investors are also preparing for next week’s Fed meeting in which it is widely expected that the Fed will announce plans to begin tapering its bond purchases. While this is not at all unexpected, it could continue to have bearish consequences for gold as QE is unwound. This unwinding could lead to dollar strength, which could also weigh on gold prices.
In addition to easing geopolitical tensions and the Fed, gold is falling victim to technical selling pressure. After falling slightly on Monday, gold prices on Tuesday closed at an uptrend line on the daily chart. In fact, prices finished just below the trend line. On Wednesday, the market was not able to stage an attempt to get back above this trend line.
This likely contributed to the large drop seen in prices on Thursday, as technical traders sell out long positions. Gold prices are now below the 9,20, and 50 day EMAs and are picking up downside momentum. We would expect that the market is likely to try and hold the $1300 level-at least on the first attempt. Should the $1300 level not hold, then we see potential support for gold prices in the $1271.50 area.
Chart Source: QST
