Volatility strikes the gold price down to $1,850

Volatility has struck the gold price this week, although signs of stability are finally returning. After diving below $1,900 an ounce, the yellow metal tested the new floor of $1,850 a couple of time. Analysts warn that gold price volatility could continue for the time being, although most are bullish on the metal in the long term.

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Q2 2020 hedge fund letters, conferences and more

Gold as a safe haven

In an email, Edward Moya of OANDA said gold prices are starting to stabilize as the surge in the dollar index starts to ease. He added that global equities are capitulating, but gold is getting its "safe-haven mojo back."

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"Gold’s long-term outlook remains bullish and will likely attract buyers at all the key technical levels," he wrote. "… Gold will resume its safe-haven status once the dollar rebound is over."

Looking out 12 months, he expects new record highs as lockdowns and new restrictions from the fall and winter wave of the coronavirus force central banks and governments to provide more accommodation.

"Gold will have to wait a little while longer for the punchbowl of stimulus to grow, but rest assured, widespread global slowdowns will be met with strong accommodation by the first quarter of next year at the latest.

Gold price volatility picks up

Credit Suisse analysts said in a report earlier this week that gold extended its consolidation or correction after the move to their base case of $2,075 or $2,080 an ounce in August. The next tests they saw were $1,897 and $1,837. Due to the extended volatility that has occurred since then, the gold price has blown through the $1,897 support, although it remains well above $1,837,

They expect the gold price to trade sideways temporarily, although they warned that if the weakness extended, volatility could press the gold price as low as $1,765 or even $1,726 an ounce. They said in order for there to be another run at $2,075, the gold price must trade above $1,993. They do see they move eventually. When the bull trend does resume, they see future resistance levels at $2,175 and then $2,300.

However, the Credit Suisse analysts noted that when there have been high levels of monthly momentum in the past, there has been a lengthy pause in the gold price. Monthly volatility through the RSI reached the extreme levels seen in 2006 and 2008, which they said adds weight to the possibility of a longer pause in the bull trend.

They noted that in the 2001 and 2011 bull markets, the two major consolidation phases lasted 16 and 18 months. However, their base case does not call for a consolidation lasting that long.

Gold price volatility brings oversold levels

After one week in the red, Commerzbank now says gold is oversold. The RSI for gold was 31 this morning, and the last time it was at that level was during the selloff in mid-March. At that time, prices rose sharply not long after, analyst Carsten Fritsch wrote.

Volatility has resulted in the gold price losing about $100 just since Monday. The price hit its lowest level in two months. He expects a price reversal for gold and suggested that since the metal touched the 100-day moving average, it could mean a countermovement is due.

He added that the positive environment for gold hasn't changed since the beginning of the week, and he doesn't expect the dollar to hold its recent gains due to the "ultra-expansionary" monetary policy of the Federal Reserve.