Gold shines as stocks plunge but where to now

Judging by gold’s $90 rally since July and the $50 gain over the past three days alone, it would appear that the metal has regained its status as the ultimate safe haven asset. Equities have come under severe pressure in recent days, with the US and European indices joining the Chinese market turmoil. Sentiment has been hurt in part because of renewed concerns about the health of the world’s second largest economy. The Flash Manufacturing PMI for China fell again in August to hit its lowest level since March 2009. The latest European PMIs were not great either, pointing to subdued demand for Chinese exports. What’s more, the central bank fiat currency ‘war’ has been re-ignited by China and now the Federal Reserve is looking increasingly unlikely to hike rates in September and maybe even December. The weaker US dollar is providing additional support for gold.

But today the metal has actually fallen, though it remains to be seen if the sellers will be able to hold their nerves for too long given for example the dual impact of the falling stock prices and a weaker US dollar. Indeed, today’s weakness could be inspired by profit-taking ahead of the weekend and as the metal has reached the bearish trend line at $1168 and the RSI moving in the ‘overbought’ threshold of about 70. Thus, gold could bounce back during the New York session or early next week.

If the metal manages to break above the bearish trend line, it would be a very bullish technical outcome as it would also confirm the break out from a potential falling wedge bullish pattern. That being said, gold does tend to respond very well to the 61.8% Fibonacci level, which hasn’t been tested yet at $1173 (this is derived from the downswing that began in May). A decisive break above the $1173 level could then see the metal go for the next key resistance around $1225/30, before making its next move.

Conversely, if the bearish trend continues to hold as resistance then there is potential for another sharp move lower from here, with the first key level of support coming in at $1125/30.