The gold price has been on a decline despite reports of negative economic data. According to SaxoBank head of commodity strategy Ole Hansen, it could drop by another 13%.
In a recent tweet, Hansen said:
Last time #gold ran away from its 200 DMA by 13% the correction did stop not before it was 13% below. Back then the rally was driven by North Korean threats. This time the ground feels firmer but a return to the 200 DMA can not yet be ruled out. Chart source: Bloomberg pic.twitter.com/CmU2M5qyFx
— Ole S Hansen (@Ole_S_Hansen) December 2, 2019
Hansen noted that the last time the gold price rose by 13% above the 200-day moving average (DMA), it proceeded to fall by 13% below the key level.
How gold could drop substantially from its current level
Gold has struggled to maintain above a key resistance level at $1,465 following the slump in U.S. manufacturing . As such, expectations for a short term gold rally to $1,500 started to subside.
The retest of the 200 DMA—currently hovering at around $1,400—is not likely right now, so it’s still too early to predict a 20% drop from $1,460.
As the U.S. and China move towards the finalization of a phase one deal, gold could struggle to remain above $1,460 as demand for risk assets outshines bullion.
China could be a variable
China has also started to release positive economic data, which has led major Asian stock markets to rally.
Following a bad several weeks for Chinese President Xi Jinping and his party, China has begun to see some signs of economic stabilization.
For months, the People’s Bank of China (PBoC) has reportedly faced difficulty in balancing the introduction of new economic stimuli and long term economic stability.
Xinhua, the official state-run news agency of the People’s Republic of China, reported that China’s purchasing managers’ index (PMI) surpassed expectations of analysts.
With the newly released data, the Bank of China Research Institute said that it is cautiously optimistic regarding China’s economy.
If gold is unable to demonstrate upward movement in the short term, a trade deal would continue to boost the U.S. and Chinese economies, making an extended rally for bullion less likely.
Positive scenario for gold
Last week, the gold futures market saw millions of dollars worth of trades betting in favor of the gold price tripling to above $4,000 in the next three years.
The near term trajectory of gold is considered to be gloomy by most technical analysts, but investors remain optimistic on the macro trend of the safe haven asset.
For gold to grow exponentially over the next two to three years, a major event that triggers a significant global economic slowdown would have to emerge.
As of now, the two major factors for an extended gold rally are an abrupt breakdown of the trade talks and recession in major global economies like the United States, Eurozone and Japan.
This article was edited by Sam Bourgi.
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