Published: February 25th, 2020
The price of gold in USD terms rallied to record lifetime highs this past week. The EUR/USD selloff pushed the yellow metal’s surge even further. The optimism created is sending investors towards call options thus reversing the appetite for risk. It is hard to tell for now if the uncertainty in the global economy caused by the outbreak and spread of coronavirus in China may prescribe a downturn or fuel further demand. That notwithstanding, traders dealing in gold are a very happy lot.
Gold rose on Thursday, February 20, to close the day with a seven-year high of $1,613. This figure represents a year-to-date increase of more than 5%. Before the record rise, the price of the yellow metal had maintained a consistent upward trend of 4% moving from $1,547 to more than $1,600 in two weeks.
The story is the same in Euro terms. XAU/EUR closed trading on Thursday on a firm position exchanging at EUR 1,490 for every ounce. This figure, though, represents a slight drop from the high of EUR 1,494 that the asset had managed during the previous night trading session.
The rise in the price of gold is attributed to the haven demand that has been occasioned by the coronavirus fears. These new prices indicate an overall rise of more than 10% in the two months of 2020 alone.
The Relative Strength Index (RSI) in the daily charts show overbought conditions in the -70 print range. The charts, however, do not give any hints of buyer exhaustion; a good sign which means the markets may witness the rally for some time.
If anything, the RSI now stands well past the trendline. The current position invalidates the bearish divergence that the markets confirmed as January came to an end.
This recent rally has increased bullish expectations and in the end, sparked an interest in call options. Call options are financial contracts that come with the option that grants the holder the right to the asset but not the obligation to buy it either at the agreed price or on a particular date as is the case with other contracts.
Gold showed signs of migrating from the contracting triangle on Thursday, February 13. This exodus marked the beginning of a rally that took it from a two-month low of $1,475. The monumental rise that followed pushed the yellow metal to $1,681 during the early Asian trading session. The surge represents an eight-year high. Gold has since descended and is trading at $1,643, but the figure still represents an increase of 6.3% against the low of $1,562 witnessed on February 2.
The precious metal matched into a new week with even more vigor. Already, it has annihilated $1,630 and $1,640.85 target points recorded during the weekend trading sessions. This difference represents an increase of more than 4% recorded in just last week’s trading sessions alone.
The last indicative rate of exchange was $1,643.15, which is just slightly above the $1,640.85 key interest point. As the new week begins, it is expected that the price will move closer to and even surpass the $1,655 target point. There are indications that this feat is possible since the asset has performed well around the $1,640.85 resistance level.
After remaining positive for seven days in a row, the bulls are expected to support the gold rally above the $1,640.85 resistance level. The driving force now is the possibility of the coronavirus fears weighing down on the global top tiers. Besides, the sentiments sent out by the global central banks confirming worries over the viral outbreak in China caused a drop in strength of the major currencies. This downturn should sustain the happiness of the bulls.
These sentiments are supported by market analysts. According to Yohay Elam of FXStreet, the Technical Confluence Indicator shows that support lines have so far outdone the resistance levels. This verdict means that the rally stands a good chance of sustaining a meaningful run.
The two bunches of support offering XAU/USD the impetus to sustain a rally are $1,613 and $1,626. The first represents the January low while the second is the upside target where XAU/USD experiences the fiercest resistance.
The $1,613 consists of the daily highs recorded in the past week and the Pivot Point of the one-week resistance. The sustained Pivot Point representing one-month resistance is nestled between these two clusters of support.
As gold maintains an impressive bull run, the asset’s one-month risk reversal data has recorded a corresponding rise. Calls to puts that had nose-dived to 0.85 on February 12, rose almost 90°-wise to settle at 2.30.
This steep increase could be an indication of either implied volatility for calls options or sustained demand for both gold and its contracts.
With the market rates standing well above the Simple Moving Averages (SMAs), the trading floors hope to stretch the recorded gains as the new week wears out. Essentially, the sustained rally may push the resistance levels up around the $1690/$1700 region. A rise in the resistance zone will herald a corresponding surge in the support level, which is anticipated to stand near the $1,660 and $1,640 levels.
In the face of the coronavirus outbreak that is ravaging China, gold has done tremendously well, rising to a seven-year high. Since 2020 began, the yellow metal has appreciated more than 10%. The bulls supporting this rally are expected to keep their feet on the gas pedal especially in the backdrop of the fears surrounding the viral outbreak in China. Besides, the clusters of support that are keeping the asset climbing exist in the same zones where the Pivot Point one-month Resistance are located. The predicted uptrend is, as such, well supported by the data available.