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Gold price declines despite risk-off sentiment, but will it continue?

Gold has been hit hard of late, but will the precious metal fall further despite the risk-off sentiment evident throughout financial markets?

Gold falls to nine-month low

Gold has been hit hard over the course of the past four months, with the precious metal falling from the early-month peak of $2070 to the $1734 level seen today.

That 16% decline comes despite a risk-off environment that many would deem supportive of haven assets.

Dollar strength dominates

One of the aspects that has dented demand for gold is the huge surge we have seen for the dollar, with the greenback providing the haven of choice throughout this crisis.

In an environment of market decline, we often see funds flow out of all assets, and precious metals can similarly come under pressure when such a selloff takes shape. As such, the dollar has provided a more reliable haven asset for traders, with the greenback gaining thanks to beneficial interest rate expectation differentials, and a lower economic risk from the Russian conflict compared with Europe.

Below we can see how the EUR/USD pair often shows a positive correlation with gold. On this occasion, we have seen EUR/USD reach a 19-year low. We are expecting to see further weakness for the pair as the dollar appreciates, thus bringing risk for gold going forward.

Treasury yields worth watching

Looking at US treasury yields, the 10-year yield had already seen sharp gains in the first quarter of the year.

Despite risks evident from the Russia crisis, the chart below highlights how we have simply entered a consolidation phase. The inverted 10-year US treasury yield is often correlated with the price of gold, and thus it is worthwhile watching for a potential reversal which could be beneficial for the precious metal.

Alternately, continued upside for yields could put pressure on gold as it heads towards a key support level.

Gold technical analysis

The weekly chart highlights how this recent decline has taken place off the back of a rally into the 2020 high of $2075. This decline has taken us back into a support zone that is formed of three lows from the past two years.

A break below the $1683 would certainly create significant anxiety for gold bulls given the risk of further downside.

The daily chart provides a more granular view, with price encroaching on that crucial $1683 threshold. However, momentum could start to shift before long, with the stochastic well into oversold territory.

The existence of an oversold market is not a buying opportunity in itself, but a move back up through the 20 threshold can highlight a market exiting that bearish phase. A look at previous such occasions does show the potential for a significant move higher when price finally moves out of oversold.

Nevertheless, with price trending lower over recent months, there is a risk that any short-term pop could simply form another lower high before gold starts to come under pressure once again. Despite this risk, the wider long-term trend for gold remains bullish.

Whiole it has come under pressure of late, we are yet to break from that trend. With that in mind, we would need to break below $1683 for the bears to truly gain a strong foothold.

This information has been prepared by IG, a trading name of IG Markets Limited. In addition to the disclaimer below, the material on this page does not contain a record of our trading prices, or an offer of, or solicitation for, a transaction in any financial instrument. IG accepts no responsibility for any use that may be made of these comments and for any consequences that result. No representation or warranty is given as to the accuracy or completeness of this information. Consequently any person acting on it does so entirely at their own risk. Any research provided does not have regard to the specific investment objectives, financial situation and needs of any specific person who may receive it. It has not been prepared in accordance with legal requirements designed to promote the independence of investment research and as such is considered to be a marketing communication. Although we are not specifically constrained from dealing ahead of our recommendations we do not seek to take advantage of them before they are provided to our clients. See full non-independent research disclaimer and quarterly summary.

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