Gold’s slide this week to a six-month low has brought it in sight of $1,525 an ounce, a critical support price which, once breached, could fatally reverse its 12-year rise.
The metal has bounced off that level three times since falling from record highs in September 2011. Since then, prices have traded in a broad sideways channel, with $1,800 an ounce capping gains and $1,525 lending support.
“That’s the big one, as far as the longer-term technical picture is concerned,” independent technical consultant Cliff Green said. “Only a break below there changes things. Until that breaks, I would still consider the long-term uptrend to be firmly intact, and that this is a consolidation within it.”
“A break beneath $1,525 changes everything. It creates a big top and threatens that longer-term bull cycle completely, probably turning it into a new bear cycle. It’s critical.”
Gold prices fell to a six-month low of $1,588.29 an ounce in early afternoon trade in Europe on Wednesday, after breaking $1,625-1,630, its previous 2013 low, late last week.
While vulnerable to more losses, gold will need a lot of momentum to break significantly lower, according to technical analysts, who study the patterns left on charts by past price moves to determine the future direction of trade.
“We have a whole batch of support between the mid-August low at $1,590, going all the way back to the May low at $1,527,” Axel Rudolph, a senior technical analyst at Commerzbank, said.
“From the whole period between May and August, you have a very big triangle formation, and that should offer a lot of support in the area.”
Spot gold prices fell nearly $150 an ounce from their early May high to a low of $1,527 later that month, and struggled to break definitively back through the $1,630 an ounce level. They failed to close a day’s trading above there until Aug. 21.
A break of Wednesday’s low would open prices up to a further decline. Societe Generale analyst Stephanie Aymes identifies intermediate support after that at $1,586.
“Since early October, prices have been trending downwards within a descending channel, and that is more or less the limit of that channel,” she said.
“You also have $1,586 and $1,555 as the starting points of the last surge in prices from the lows of July and August,” she added.
The $1,600 level proved resilient earlier this week, helped by a return of Chinese buyers to the market after the Lunar New Year holiday.
Gold’s more than $50 an ounce drop last week has left it in oversold territory, according to its 14-day relative strength index (RSI) which stands at 23.5, its lowest since last May. Any reading below 30 signals oversold conditions.
But the metal still looks vulnerable, analysts said. Its repeated failure to clear $1,800 an ounce in 2012 hurt investors’ confidence in the metal, causing traders to cut bets on rising prices.
European consumers’ interest in coins and bars, which surged in the depths of the euro zone debt crisis, has also dropped as worries over the bloc’s financial health abated, while jewellery demand fell last year in the key Indian and Chinese markets.
Technical signals also suggest more losses to come. ScotiaMocatta said in a report that the gold’s average directional movement index (ADX), a measure of the strength of a trend, suggested the downward trend still has strong momentum.
That will have to hold firm to take gold through the support it faces before it can get back to its channel lows.
“If we get below that, that will be the reversal,” Societe Generale’s Aymes said. “If you close below $1,520… that would be very negative. That’s a big, big level.”
(Reporting by Jan Harvey; Editing by Veronica Brown and Anthony Barker)