Gold (XAU/USD) tumbles lower, now flirts with key level of $4,000: Is the rally over?

Renewing all-time highs by a whisker on Monday, at around $4,381 per troy ounce, gold has since experienced some significant downside, falling over 5.25% in yesterday’s session.

In today’s session, gold has fallen further, down 2.18% at $4,035.

Now in striking distance of the key psychological level of $4,000, having surpassed it for the first time in history only 10 days prior, what’s next for the yellow metal?

• Falling in excess of 8.00% in the last two sessions alone, a spell of selling pressure has entered into precious metal markets following recent upside
• Gaining almost a ⅓ in value since late August, recent gold price action has become technically unsustainable, which has led to some profit-taking early into this week’s trading
• Otherwise, and especially considering the Federal Reserve is widely expected to cut rates in its meeting next week, the fundamental outlook for gold remains strong

Read previous coverage: Gold (XAU/USD): Short-term bullish reversal triggered after 8% sell-off

While most are familiar with the ebb and flow of the financial markets, it’s easy to get carried away…

Generally, I tend to write an article on gold once a week, and today’s coverage marks the first time in over a month that I can say that gold bullion has not hit another all-time high.

If I were writing this on Monday, perhaps this would be a different story, but as I speak, gold is tumbling lower with the key level of $4,000 now coming into serious contention.

Benefiting from an endless supply of economic tailwinds in recent months, it’s easy to forget that markets don’t trend in straight lines and retracements towards the average are only a matter of time.

That time, it would seem, is now for gold markets, with prices down nigh on 9.00% from the highs.

When combined with the impact of short-term long positions at high leverage, as expertly explained by Kelvin in previous commentary, you’ve got a recipe for massive downside, as seen in yesterday’s session.

Case in point, yesterday’s price action represents gold’s worst daily performance since 2020.

In a break from regularly scheduled programming, and since the recent downside is primarily technical selling, let’s take a look at the charts first and discuss some fundamental themes thereafter.

Renewing all-time highs on Monday at $4,381, recent price action has broken the existing trend line to the downside, suggesting the current bull run is out of steam - at least for now.

According to my own analysis, one of the following two scenarios will play out in the coming days and weeks:

1. Gold price action will form a base, consolidate, and stage another leg higher, aiming to overcome resistance held at ~$4,240

2. Gold price action will continue downward sharply, with a move under $4,000 offering further downside to ~$3,889

Switching to technical indicators, Stochastics has consistently rated the gold price as overbought for some time, until recent downside.

While no one can say how high is too high for gold pricing, the very notion of overbought and oversold helps illustrate that gold was due for a retracement for some time. It cannot be ignored that gold is currently up ~54.09% to date and remains on track for its best yearly performance in history - some food for thought.

The million-dollar question, however, is whether recent price action represents a healthy correction as part of standard price action or a broad-scale change in trend.

Price targets and support/resistance levels:

• Price target 1: Previous area of support: $4,240
• Price target 2: All-time highs: $4,381
• Support 1: Trendline: $4,115 (broken)
• Support 2: Psychological level: $4,000
• Support 3: Previous area of support: $3,976
• Support 4: Fib level: $3,889

Read more coverage from MarketPulse: U.S. Budget Stalemate Deepens as Partial Government Shutdown Drags On

To finish, and since fundamentals remain relatively unchanged, let’s do a quickfire round of economic themes currently at play in precious metal markets.

Easing US-China tensions: Albeit somewhat late to the gold rally party, the renewed trade tensions between the US and China offered further encouragement for gold pricing. More recently, however, tensions have eased, with Trump calling the current standoff “unsustainable” during a media interview and agreeing to a meeting with President Xi Jinping. If nothing else, easing trade tensions removes a significant tailwind to gold upside - in part explaining recent selling pressure.

Ongoing government shutdown: Part of the geopolitical furniture at this point, the US government remains subject to shutdowns due to disagreements over sovereign funding. In a nutshell, the longer the shutdown continues, not only does damage to the American economy increase exponentially, but also the safe-haven premium for precious metals.

Federal Reserve rate cuts ‘nailed-on’: As things stand, markets are more confident than ever that the Federal Reserve will cut rates by 25 basis points in their decision next week. As a non-yielding asset, and considering how lower rates will affect bond yields, any notion of lower rates, whether in the immediate or priced in, can be regarded as gold positive.

Continue reading more MarketPulse coverage: GBP/USD Slide Continues After UK Inflation Data. Is the Door Open for December BoE Rate Cut?