Gold rebounds after steep plunge

Gold rebounded on Wednesday after sinking 5.7 per cent in the previous session, in the biggest single-day decline in seven years, to below $1,864 per ounce, as equities stalled on doubts over an additional round of US fiscal stimulus and rising Sino-US tensions.

The yellow metal surged around $60 during the European session and spiked to fresh daily tops, near the $1935-45 region in the last hour after hitting a low $1863.15 per ounce early on Wednesday. The plunge in gold was accompanied by a sell-off in US treasuries. However, by mid-afternoon, gold rose to $1,941.33 an ounce.

The commodity, for now, seems to have snapped three consecutive days of the losing streak and stall the recent sharp corrective slide from record highs - set on August 8. After dropping as much as 5.7 per cent on Tuesday, the biggest one-day loss in seven years, spot gold sank as much as 2.6 per cent to $1,863.15 an ounce. The metal then rebounded sharply, rising as much as two per cent and was trading at $1,941.33 at 0355GMT in London. Silver rose 4.6 per cent higher.

A 30 per cent rally this year drove the yellow metal to all time high of $2063 last week.

Precious metal analysts said many gold traders were "looking for an excuse to lock-in profits" and found a reason to sell in Russia's coronavirus vaccine approval.

"Gold is fast approaching support of the ascending trend-line rising from March 20 and June 5 lows, having breached the psychological support of $1,900 a few minutes before press time. The yellow metal is currently trading near $1,880 per ounce and the rising trendline support is located at $1,860. The 14-day relative strength index has breached the trendline representing the bull-run from lows near $1,450 seen in March. The indicator is now hovering in bearish territory below 50," they said.

"Expectations of a V-shaped recovery from the coronavirus lockdowns remain far-fetched," Avtar Sandu, senior manager for commodities at broker Phillip Futures in Singapore, said in a note.

"The long-term fundamental drivers of gold remain positive in outlook. However, in the short run, gold prices seem to be reacting to headline news events and the technical picture has projected some consolidation ahead."

Precious metal analyst Christopher Lewis wrote the gold market had been on fire as of late, so selling off the way it has should not be a huge surprise considering that it is a small market.
"After all, if a huge player comes into the market and looks to take advantage of profits, that can kick off a lot of algorithmic trading, and cause a bit of a chain reaction."

"After this absolute shellacking during the day, I think there will be a lot of traders out there looking their wounds, and this could set up for a nice buying opportunity, perhaps later in the week. I would not jump into it right away, and I think that the $1900 level will be crucial to pay attention to. If we can stay above that level, then it is only a matter of time before the buyers return and break back over the $2000 handle," said Lewis.

Analysts said despite the current sell-off, the future remains positive for the gold price. "There is too much geopolitical uncertainty, and global economic growth is likely to remain fragile."

"Looking at the daily chart, it appears that a big correction has already taken place as the gold price is close its 50-day moving average. Currently, the 50-day smooth moving average (SMA) is trading at $1,829, and the spot gold price per ounce is $1,869. The other two crucial price levels for the gold price (if the price continues its journey to the downside) are 100-day moving average, trading at $1,762, and 200-day SMA currently at $1,650. This is the lowest level the gold price can fall, for now," one analyst wrote.