- Gold faces key support at $2900 after a recent drop.
- RSI warns of a potential pullback.
- US dollar weakness fuels gold’s volatility.
- Looking for more actionable trade ideas? Subscribe here to unlock access to ProPicks AI winners.
Gold
Gold rebounded in the first half of Monday’s session after a relatively sharp drop on Friday. The rebound was not driven by any specific factors, especially with the US being out today and the macro calendar quite quiet. With prices now back around the pivotal level of $2900, what gold does here could set the tone for the next few days at least. Friday’s bearish-looking price action warrants caution, while the lack of downside follow-through so far in the session means dip-buying remains the dominant theme in gold. But the question remains whether prices will further retreat in the short-term outlook from severely overbought levels, or whether gold will try to reach for $3000 mark first.
Was Friday a Key Reversal Day for Gold or a Mere Dip?
On Friday, gold turned sharply lower on the session, after failing to break the record high of $2942 that was set earlier in the week. It reached a session high of $2940, before slumping $63 to a session low of $2877. On the way down, it broke a key short-term support area of around $2900 to $2905. This area was now being tested from underneath, which may turn into resistance. For as long we now don’t close back above this area, the bears would feel they may have gained some control of short-term price action, in light of Friday’s reversal-looking price action, when the metal formed a bearish engulfing candle on the daily chart.
Despite Friday’s reversal, gold remains firmly in an uptrend, consistently setting new highs. However, signs of exhaustion have now started to emerge. Let's see how much further selling pressure will the bears be able to bring here, if any.
The price of gold had reached extreme levels, as per the Relative Strength Index (RSI), which was flashing overbought signals across multiple timeframes. The daily RSI was sitting near 78 before Friday’s drop, which has sent it to just below 70.0
To make things worse, the weekly RSI remains around 75, showing a negative divergence with the underlying price of gold (making a lower high relative to last week’s higher high in gold prices). The negative divergence can be a sign of weakening momentum.
Meanwhile, the monthly RSI is around 80.
These RSI levels suggest that a pullback or consolidation may be on the horizon, which may now be underway after Friday’s bearish reversal pattern. Yet, the lack of renewed selling pressure is keeping many bears away – for now.
Still, the long-term overbought RSI conditions, and Friday’s price action, serve as a warning for the bulls to remain vigilant, and that one should not take anything for granted in trading.
So, What Is Driving All This Volatility in Gold?
It looks like the US dollar is at the centre of the action. Despite hotter-than-expected inflation data last week, the greenback softened following Trump’s more measured stance on tariffs, while the euro found support amid his expressed willingness to end the Ukraine conflict.
Previously, gold was ignoring all the dollar strength and was rallying, breaking the historic negative relationship. Gold’s decoupling from that trend seems to have been the reason why it fell so sharply on Friday.
All this begs the question of whether this is the start of a long-overdue correction.
To be fair, gold needs a correction shortly to remove some speculative froth, especially when you consider Trump’s declaration that he intends to bring an end to the conflicts in Gaza and Ukraine raises the prospect of reduced haven demand, should he succeed. At the same time, his protectionist stance and expansive spending plans could keep US inflation elevated, delaying rate cut expectations and lending support to bond yields.
Disclaimer: This article is written for informational purposes only; it does not constitute a solicitation, offer, advice, counsel or recommendation to invest as such it is not intended to incentivize the purchase of assets in any way. I would like to remind you that any type of asset, is evaluated from multiple perspectives and is highly risky and therefore, any investment decision and the associated risk remains with the investor.