Is gold headed significantly lower?

Technical trading may have the upper hand now as Comex gold December futures fails to break the US$1,923.7/oz level reached on Sept. 5 and volatility continues. More technical analysts are echoing that gold price is topping out and expecting price weakness in the short-term.

News on the currency side including the sudden breakout last week of the dollar index above its five-month range of 73 to 76 and the engineered depreciation of the Swiss franc (which used to rise in tandem with gold) by the Swiss National Bank also caused gold price to first sell-off and then rebound to the middle of a wide-trading range. One-month implied volatility reached its 2.5-year high to 34.2% on Sept. 12.

The CFTC also reported that for the week ending Sept. 6, the non-commercial accounts reversed their positions in August and added net-long 8,866 contracts, suggesting that speculators in gold have returned.

One technical analyst pointed out that the gold market looks over-extended as price has hit a trendline target; coupled with heavy downside trading volume, increased daily volatility, MACD (momentum) indicator still in overbought territory and a small double-top forming, $1,900 to $1,930 looks a key resistance level for gold. A longer-term chart of gold puts its recent intra-day peak at just above the upper trend line of the broad channel, which means if volume on down days continues to be high, price can decline to the $1,600 level (an over 10% drop) for it to be still within the long-term upward channel. Another analyst reckoned that gold could target $1,792.50, the low reached last week, then $1,774.35 and $1,702.30.

For gold price to resume its upward strength, price would have to clearly break and hold above $1,920 which is viewed by many chartists as a strong resistance level. But if gold price continues to consolidate along its resistance line, it could potentially rise to $1,950, followed by the big figure of $2,000.

Robert Jilles is an analyst at London-based gold broker Sharps Pixley Ltd.

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