Gold technical analysis: Overbought conditions need addressing

Gold technical analysis: weekly RSI above 75
Gold may be unable to defy rising yields for too long
US CPI coming up later in the week

Gold hits news record before easing back a tad

Over the weekend, there was no further escalation in the conflict between Iran and Israel, which meant there was a bit of relief in the sharp rallies we have observed in crude oil and gold prices in recent weeks. However, the precious metal's dip was swiftly bought during the Asian session, leading to another rise to a record high of over $2350, before it started to ease back lower. This was driven in part because of technical momentum, after the metal closed near the highs on the week on Friday. But following a big 9% rally last month and a further 5% or so this month, gold is now finding itself at extremely overbought levels. So, it is quite intriguing to see whether the metal can maintain these lofty levels, or will it stage an overdue correction now.

Gold may be unable to defy rising yields for too long

Gold investors appear to be turning a blind eye to the strength of US bond market and economic data, with Friday's robust US jobs report, boasting a headline figure of over 300K, couldn’t stop the metal from hitting a fresh record. Yet, with government debt yields on the rise, the opportunity cost of holding gold is increasing from a yields perspective, given the metal’s lack of interest-bearing attributes. Consequently, the risk of a correction is indeed on the rise. At some stage, investors will prefer to utilise their investment capital in opting for a fix guaranteed return than hoping to see further capital appreciation in gold.

Gold technical analysis: weekly RSI above 75

Undoubtedly, gold is looking rather overbought by almost any metric you employ.

Let’s start by looking at the weekly chart:

Gold is looking quite overbought on the weekly chart with the RSI rising above 75.00, which is an extremely overbought level. In previous occasions that gold had moved above the 70 threshold you can see that it was preceded by a sell off. While past price action is not necessarily an indicator of future performance, you can’t ignore the risk of gold heading at least a little lower from current levels and in light of a sharp two-week rally.

In addition to the RSI being in overbought territory, gold is also near the 161.8% Fibonacci extension level at $2359. This Fibonacci extension level is derived using the high of August 2020 and the September 2022 low.

A small pullback, if seen, will not necessarily be the end of the bullish trend. Indeed, people who have missed the opportunity to buy gold at lower levels will be looking to buy any dips that they may get their hands on to.

Gold technical analysis: Can gold dip back to trend support?

On the daily time frame, we can see price action in greater detail.

As seen from the sub-chart, the Relative Strength Index (RSI) is comfortably above the 70.0 threshold, suggesting we may witness some profit-taking or consolidation in the week ahead. The robust bullish trend means any substantial decline could find support. Short-term support is around $2300 now, followed by a more critical zone around $2222, and then the $2195/2200 area.

The $2222 area is also where the 21-day exponential moving average converges with the bullish trend line. Can we see a dip on XAUUSD to this level in the coming days?

The overbought conditions signalled by the RSI can be rectified through time, particularly if gold consolidates around current levels for a few days, without giving back too much ground, say past the $2222 level. This would be the optimal scenario for gold investors, considering the metal's rapid ascent in recent days.

Source for all charts used in this article: TradingView.com

-- Written by Fawad Razaqzada, Market Analyst

Follow Fawad on Twitter @Trader_F_R

How to trade with City Index

You can trade with City Index by following these four easy steps:

Open an account, or log in if you’re already a customer

• Open an account in the UK
• Open an account in Australia
• Open an account in Singapore
Search for the company you want to trade in our award-winning platform
Choose your position and size, and your stop and limit levels
Place the trade

From time to time, StoneX Financial Pty Ltd (“we”, “our”) website may contain links to other sites and/or resources provided by third parties. These links and/or resources are provided for your information only and we have no control over the contents of those materials, and in no way endorse their content. Any analysis, opinion, commentary or research-based material on our website is for information and educational purposes only and is not, in any circumstances, intended to be an offer, recommendation or solicitation to buy or sell. You should always seek independent advice as to your suitability to speculate in any related markets and your ability to assume the associated risks, if you are at all unsure. No representation or warranty is made, express or implied, that the materials on our website are complete or accurate. We are not under any obligation to update any such material.

As such, we (and/or our associated companies) will not be responsible or liable for any loss or damage incurred by you or any third party arising out of, or in connection with, any use of the information on our website (other than with regards to any duty or liability that we are unable to limit or exclude by law or under the applicable regulatory system) and any such liability is hereby expressly disclaimed.

City Index is a trading name of StoneX Financial Pty Ltd.

The material provided herein is general in nature and does not take into account your objectives, financial situation or needs.

While every care has been taken in preparing this material, we do not provide any representation or warranty (express or implied) with respect to its completeness or accuracy. This is not an invitation or an offer to invest nor is it a recommendation to buy or sell investments.

StoneX recommends you to seek independent financial and legal advice before making any financial investment decision. Trading CFDs and FX on margin carries a higher level of risk, and may not be suitable for all investors. The possibility exists that you could lose more than your initial investment further CFD investors do not own or have any rights to the underlying assets.

It is important you consider our Financial Services Guide and Product Disclosure Statement (PDS) available at www.cityindex.com/en-au/terms-and-policies/, before deciding to acquire or hold our products. As a part of our market risk management, we may take the opposite side of your trade. Our Target Market Determination (TMD) is also available at www.cityindex.com/en-au/terms-and-policies/.

StoneX Financial Pty Ltd, Suite 28.01, 264 George Street, Sydney, NSW 2000 (ACN 141 774 727, AFSL 345646) is the CFD issuer and our products are traded off exchange.