Gold’s latest slide has helped wipe out half the gains from the last decade’s historic bull run, taking prices back to a key chart level on Monday and threatening a break towards $1,000 an ounce.
Gold slid to a five-year low of $1,088.05 an ounce overnight in Asia, approximately a 50 percent retracement of the rally from its 1999 low of $251.70 to its record high of $1,920.30 seen in September 2011.
Technical analysts, who study past price patterns for clues to future direction of trade, expect this level to hold for now. However, a break could see gold drop back to levels not seen in nearly six years.
“Not only is it the 50 percent retracement of the entire bull move up from the 1999 low, it’s also the approximate location of a 40-year pivot line which comes in at $1,095,” Commerzbank technical analyst Karen Jones said.
A pivot point is a key area of support and/or resistance derived from the high, low and close of a given period.
“The price action, with a spike down to a huge target zone, does look exhaustive,” Jones added. “(But) if for some reason $1,087 doesn’t hold as we expect, you have $1,033, the March 2008 high, and the $1,000 psychological support below there.”
The 61.8 percent retracement stands near $890 an ounce.
Gold’s break down to the day’s low came as sellers in the Asian time zone caught up with counterparts in Europe and the United States, who sold gold heavily on Friday after upbeat U.S. data shored up expectations for an interest rate hike later this year.
Some said ‘sell’ or stop-loss orders were triggered by the downturn.
“The support area between $1,130 and 1,135 was where a lot of stops were sitting,” Cliff Green, independent technical analyst at the Cliff Green Consultancy, said. “A lot of the move was technical stop-lossing.”
In the short term, gold’s move lower looks overextended, pointing to a possible near-term bounce. Gold’s 14-day relative strength index earlier fell as low as 13, Jones said. A reading below 30 suggests oversold conditions.
Yet some technical analysts say after a move of Monday’s magnitude, a recovery is likely to be limited.
“For me, if gold got back towards ($1,143), you’d be looking to start reselling it,” Credit Suisse analyst Christopher Hine said. “What today’s move does is kick off the bigger bear trend. $1,087 is the next downside target… then, for me, $1,044, $1,033, $1,006 and $1,000 is where we’re gunning for.”
Gold’s 2010 low is located at $1,044, while $1,006 is the high from February 2009, the top of the initial leg of the rally from the metal’s 2008 lows.
“That could end up being too conservative when you look out three to six months from here,” Hine added.