Gold prices, as measured by XAU/USD, fell dramatically on Tuesday. This continued downturn came after a short-lived experiment with all-time highs near $4,380 the day prior. The recent precious metal crash is likely due to a strong US dollar. This new backdrop has significantly altered market sentiment and reversed the historic pattern of investment flows into gold.
On Monday, XAU/USD jumped to over $4,380. As of Tuesday morning trading, it had fallen to about $4,175 and was still in decline. That was a decline of over 4% on the day, setting a five-day low. The XAU/USD 4-hour chart has revealed a double top pattern which has analysts worried. This pattern has two peaks that are almost equal and at record high levels.
Another sign of a change in market momentum was provided by the Relative Strength Index (RSI). A drop below the 50 threshold on the RSI strengthens the case for a deeper corrective pullback for gold prices. This technical indicator is a bullish crossover that indicates the recent selling pressure could see new lows before any meaningful recovery.
Bearish sentiment deepens as XAU/USD confirmed a breakout below its 21-period Simple Moving Average (SMA). This SMA now acts as short-term resistance if buyers attempt to orchestrate a recovery. Short term, the outlook for gold is increasingly bearish. Primary support at $4,200 is a significant floor that’s aligned with the neckline of the double top formation.
A sustained downturn underneath the $4,200 level may validate a short-term bearish turn for gold’s advance. A break of this would leave the 50-period SMA just below at approximately $4,180 the next major swing low support. If there is continued heavy selling pressure, the market could fall even further down toward the $4,050 level. There, the 100-period SMA will make for stronger support to stabilize prices.
Even with the current gold price action being negative, a confluence of factors remains supportive to continued safe haven demand for the yellow metal. The ongoing US government shutdown, coupled with lingering geopolitical and economic uncertainties, continues to drive investor interest in precious metals like gold. All of these features continue to support strong inflows into XAU/USD even as prices are going down.
As we will see, the strong dollar’s role in gold’s recent price action cannot be overstated. The US Dollar Index (DXY) is sitting at 98.84, near one-week highs. This increase is affecting gold’s attractiveness as a non-correlated investment. Adding to the pressure on XAU/USD has been the Greenback’s extraordinary strength against all major currencies.
One other item market participants are focusing their attention on is the US economic calendar, which is still pretty light this week. Though Friday’s Consumer Price Index (CPI) release is likely to be the most influential piece of US data for XAU/USD. This important economic release has the potential to change inflation expectations and, by extension, affect investor sentiment towards gold.