Market Bites - Gold Breaks 7-Year High

Phillip Futures

Published On: 21 February 2020

Summary of what has happened
From the US$1,200/oz level in July 2018, gold continued its bullish momentum till it broke through the US$1,350 resistance. It then rallied to US$1,550/oz, where it consolidated for a month till Dec 2019 before attaining the US$1,620 levels in mid Jan 2020. Last night, it began trading at levels last seen 7 years ago, and prices reached a new high this morning.

Why are we seeing current prices?
The gold market has been driven by a number of factors: The COVID-19 virus has brought a great amount of uncertainty in financial markets because of the large number of unknowns about it. This has encouraged buying of safe-haven assets like gold, due to the virus effecting a slowdown to China and its regional trading partners.

Stimulus and liquidity are normally a boon to safe haven assets. The Chinese government has introduced more rate cuts and has also increased liquidity. Yesterday, China’s People’s Bank of China (PBOC) reduced the country’s 1- year loan prime rate by 10bps and 5- year loan prime rate by 5bps. This, coupled with the announcement that Hubei’s factories and firms would be closed till 10 March 2020, provided the catalyst to the gold market. Additionally, there was also talk in the market that the Fed would cut interest rates at the end of the year. Due to these reasons, both the regular and proprietary traders have been piling into the gold market on expectations that the Chinese are going to further increase stimulus.

What is likely to happen?
Although technical indicators are showing overbought conditions for the gold market, momentum is propelling the market forward. Momentum and Breakout Funds are expected to push prices to test the next resistance. However, overbought conditions may bring about profit taking by long positions that have been established long ago. This is substantiated by the RSI which is starting to show some divergence.

COMEX GC April 20 Daily Futures Contract

Key Support and Resistance Levels
Immediate support for the GC April 20 contract is at the recent high of 1619.6, followed by the psychological level of 1600 and then at 1550. As the chart points for the top side were established years ago, it is difficult to pin down the resistance, however, we would put it down at the psychological levels of 1650 followed by 1700.


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