Since gold prices hit $1,611 last week, the highest levels since 2013, the price action has been continuously moving lower in the last few days as trade tensions have eased. The recent market behaviour suggests that the short-term top is in place and that the gold price may have consolidated at levels below $1,500.
Fundamental analysis: Improved risk appetite
The assassination of the top Iranian general sent gold prices to a seven-year high last week. However, easing tensions in the Middle East prompted investors to move back to riskier bets, namely stocks.
Furthermore, the U.S. earnings have started extremely well as the bulk of the companies have already reported better-than-expected results. This has also prompted investors to shift back funds towards higher yielding assets.
“The banks are painting a picture that the U.S. consumer remains strong and that should support fresh record highs with U.S. stocks,” said Edward Moya, senior market analyst at Oanda.
Moreover, the dollar may gain more in the coming weeks which should weigh on gold prices this year as well.
“We also think that the U.S. economy will benefit from a pick-up in growth in the second quarter, providing additional demand for the dollar. As such, gold prices will probably remain elevated in the near term, before trending down in the second half of the year,” noted Capital Economics commodities economist Alexander Kozul-Wright.
“While the price of gold remains elevated at present, we think it’s only a matter of time before it begins to ease back. Subdued gold imports in China and India and softer safe-haven demand should depress the price,” Kozul-Wright added.
Technical analysis: A retreat is possible
Technically, a break of the $1,530 resistance has been very important for the price action. The price quickly tested the key Fibonacci retracement, at $1,590, but it returned lower again. In the aftermath, gold prices already completed the trip lower to old resistance, now acting as a support.
The most likely scenario is a price consolidation at the current levels. A move below $1,530 should pave the way for a bigger correction lower, possibly towards the major support at $1,365, as seen in the chart above.
This assessment is in line with the analysis of Capital Economics for gold prices in 2020, who project gold prices to finish the year around $1,400. As always with gold prices, the key catalyst will remain the geopolitical situation around the globe, with a focus on the troubled Mideast.
Gold hit the highest levels since 2013 on the back of the increased Mideast tensions in the first week of the new year. However, these tensions have decreased since, and the Gold followed lower as well. There is a fair possibility we will see a retreat from these levels.