Gold prices have slipped from their record highs as the yellow metal plunged 2% on Monday due to decreasing safe-haven demand.
This decline was attributed to increased investor risk appetite for equities, fueled by optimism about de-escalating US-China trade tensions.
Investors are now looking ahead to major central bank meetings scheduled for this week, anticipating potential cues for interest rate cuts.
Last week, gold reached a record high of $4,381. This occurred despite its daily moving average convergence and divergence (MACD) indicating that it was significantly overbought.
“But prices dropped sharply after that, and by Wednesday morning it was closing in on $4,400 to register an overall high-to-low decline of close to 9%,” said David Morrison, senior market analyst at Trade Nation.
“It then bounced sharply but ran out of puff as it approached $4,150,” Morrison said.
It looks as if this has become gold’s first upside resistance target.
Prices need to break and hold above here to signal that further gains are possible.
The daily MACD experienced a sharp pullback on Monday.
Although it is no longer significantly overbought, it now suggests an increase in downward momentum, according to Morrison.
At the time of writing, the December gold contract on COMEX was at $4,047.86 per ounce, down 2.2% from the previous close.
US-China trade talks dent momentum
Asian stocks saw a strong start to the week, surging due to an improved risk appetite.
This was driven by signs of easing trade tensions between China and the US.
Key events later in the week include central bank meetings and earnings reports from megacap companies.
Market sentiment is currently being uplifted by comments from US President Donald Trump.
His renewed optimism about the upcoming trade deal with Chinese President Xi Jinping later this week has allayed fears of additional global trade restrictions.
Trump also signed separate trade framework pacts with Malaysia, Thailand, Vietnam, and Cambodia.
“Although markets are in a buoyant mood, a degree of caution prevails as focus shifts squarely to monetary policy,” Vishal Chaturvedi, editor at FXstreet, said in a note.
Fed rate cut
The US Federal Reserve is anticipated to reduce interest rates by 0.25% on Wednesday.
This expectation is reinforced by September’s inflation figures, which were lower than predicted.
Markets have already factored in a 25-basis-point rate cut and are now awaiting any forward-looking statements from Fed Chair Jerome Powell at the upcoming meeting.
Markets are currently pricing in a 96.7% chance of a 25-basis-point rate cut at the upcoming October 29-30 monetary policy meeting.
Additionally, there’s a 95.8% probability of a further rate cut in December, according to the CME FedWatch Tool.
Reduced borrowing costs generally make non-yielding assets such as gold more attractive.
This is because lower borrowing expenses decrease the opportunity cost associated with holding gold.
Technical outlook
Gold prices are struggling to stay above the key psychological level of $4,000, indicating that bears are still in control.
The metal is trading below both its 50-period and 100-period Simple Moving Averages (SMAs), specifically at $4,187 and $4,107, which further reinforces the dominance of sellers, according to FXstreet.
Bulls might try to hold the $4,000 mark, which is currently acting as immediate support.
However, the momentum at this level remains weak.
“A decisive break below $4,000 would likely embolden bears, paving the way for further downside toward $3,950 and even $3,900,” Chaturvedi said.
The $4,100-$4,150 range presents immediate resistance, a level at which sellers have consistently halted upward movements.
“Fundamentally, all the positive news around the US-China trade rapprochement has lessened gold’s haven appeal – for now,” Trade Nation’s Morrison added.
But that’s not to say that gold won’t find a floor at some stage, and that may persuade traders to come back in on the buy side.
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