Gold has fallen over 11% since August as the world fights back against the ravaging virus. With yesterday’s break below 1845, the yellow metal is set to plunge further.
The recent vaccine development is taking attention away from Gold as a safe-haven instrument. Investors are confident that the pandemic virus will be maintained and economies will recover gradually. This wave of optimism drives investors’ risk appetite. Safe-haven assets like Gold have been at the receiving end of the beating. The dollar-denominated commodity has falling massively on Mondays shortly after vaccine announcements – over 6.5% decline in the last three weeks. With the banks planning to offer more support and lockdown, more vaccine-related news, and the government providing more stimulus, Gold’s medium-term direction remains to the downside. Ideally, a dip below the 1800 psychological level is high on the cards. Whether that will happen in December or January remains to be seen. Looking forward, what factors could trigger Gold bears or cause a significant bounce?
Traders have to watch for more news headlines coming from the vaccines. More companies will declare their vaccine efficiency. At some point, the market will react mildly to vaccine positive news. Afterward, more concern will be relayed on clinical tests, and when these vaccines will be available for commercial use. Vaccine means no more lockdowns and economies back in full shape. Therefore more money flows from safe-haven assets to riskier assets.
The Dollar effect and the Fed
Gold and dollar relationship change with the overall risk sentiment and investors’ preference between the two safe-havens. When the pandemic was strong in February, Gold and dollar surged together. However, investors withdrew from dollar to Gold after the US Fed and other central banks started jawboning their currencies by cutting down rates in order to inject liquidity into their economies. While Gold rallied to its all-time high up to early August, the dollar plunged massively. However, since August, the dollar has acted as a base for the metal. The dollar strength has therefore weighed on the dollar-denominated instrument. On Monday, besides the vaccine development, Gold fell partly as a result of a sudden dollar rally. Traders need to continue to watch the relationship between these two instruments in the coming weeks. Next on the agenda is Wednesday’s FOMC meeting. We will have the opportunity to see which direction investors’ sentiment is driving. If the Fed decides to pump more money, for example, will Gold rally as a result of the dollar possible weakness or fall with the dollar as safe-havens?
Government and Bank’s stimulus
Generally, more stimulus should weaken the safe-haven Gold. The US Congress is ready to begin discussions concerning the next stimulus package. The ECB in December could follow and then BoC, RBoC, and BoJ in their next meetings. With positivity around vaccines, this might put much pressure on Gold.
Technical Analysis: Long-term Outlook
The overall long-term Elliott wave outlook for Gold suggests a 5-wave cycle degree (black) impulse wave move is in the last stage – the 5th wave. However, the 5th primary wave (in red) which started in November 2015 at $1048 is not yet over. The current dip can be taken as the 4th primary wave (in red) which could go as low as the 38.2% Fibonacci retracement of primary wave 3 (in red) at $1719. Gold could go as low as that in the long-term or at least touch the $1790-1800 support zone. At the end of the 4th primary wave, the next Gold rally should project to $2200 or higher
The medium-term outlook suggests a double zigzag bearish structure emerging for the primary wave 4 (circled in red). The intermediate wave (W) and (X) ended at 1850 and 1965 respectively. Intermediate wave (Y) could also complete another zigzag structure. Therefore, Gold might bounce off at the next diagonal support at 1805-1808 to retest the 1845-1860 resistance zone before the next decline below 1750, and maybe the long-term target at 1719.
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