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A sharp drop in gold leads to major technical damage on the charts

As a direct result of an extremely strong US Dollar, gold prices fell today causing significant technical damage to the charts. The dollar has gained significant value over the past two weeks, however, longer-term studies reveal that the dollar has been on an upward trajectory since the start of 2021, when the dollar index was pegged at 90.

The dollar index compares the US dollar to a basket of six major currencies. Today, the Dollar Index gained 1.34% for a total of 1.406 points and is currently pegged at 106.315. Although dollar strength has increased over the past two years, dollar strength recently accelerated in March when the Federal Reserve began raising interest rates for the first time since 2018.

Since raising interest rates by ¼% in March, the Federal Reserve has raised its federal funds rate from near zero to 1.5%-1.75%. In the last three FOMC meetings, the Federal Reserve first raised its federal funds rate by 25 basis points in March, 50 basis points in May and 75 basis points in June. The Federal Reserve is also expected to raise rates another 75 basis points at the FOMC meeting later this month.

The rate hikes by the Federal Reserve were in response to extremely high levels of inflation that continue to run at a 40-year high. The latest data from the US government indicates that the CPI (consumer price index) was at 8.3% in May. The most recent economic data in Europe is equally alarming, with the May 2022 consumer price index for the Eurozone now pegged at 8.8% year-on-year.

It was the rise in interest rates that strongly supported the dollar, taking it today to its highest level in 20 years. During the week of June 27, the dollar index opened just under 104 and gained more than 2% over the past six trading sessions. Based on the recent breakout in the dollar, our technical studies indicate that the next resistance level does not occur until 107.467. Furthermore, it shows that a major resistance at the technical level is occurring at 112.95.

Fears of an inevitable recession based on rising interest rates fueled not only dollar strength but gold selling pressure on top of that. Together, these two forces sent gold down $300 from its yearly high of $2,078 in March, a price drop of 15.158%.

On a technical level, this caused major damage to the cards due to two major technical studies. First, today’s price decline has taken gold below its 78% Fibonacci retracement. The dataset used for this retracement series begins in August 2020 when gold traded at a low of $1671 all the way to the March 2022 high of $2078. The second technical study used to confirm that gold has suffered technical chart damage is a compression triangle. Today’s sharp price decline has pushed the price of gold through the lower support trendline. The support trendline was created by setting the two most recent lows. The first low occurred on March 16 when gold traded at a low of $1785, with the second low being set at $1805, a low that occurred in mid-June this year.

Based on gold’s continued selling pressure capped by the current low of $35+, the question is where could gold find technical support? The chart above looks at potential support levels by looking at the most recent price lows. The first potential level of support is located at $1720. This level is based on a short-term low seen in October 2021. Beneath it is the August 2020 low when gold hit $1673 before rallying and trading higher.

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Wishing you as always good exchanges,

Disclaimer: The opinions expressed in this article are those of the author and may not reflect those of Kitco Metals Inc. The author has made every effort to ensure the accuracy of the information provided; however, neither Kitco Metals Inc. nor the author can guarantee such accuracy. This article is strictly for informational purposes only. This is not a solicitation to trade commodities, securities or other financial instruments. Kitco Metals Inc. and the author of this article accept no responsibility for loss and/or damage resulting from the use of this publication.

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