Two Scenarios For Gold: Rally or Deeper Retracement?

For the past few days, we can see some interesting signs starting to appear in precious metals. Despite recent declines, which were quite expected, it seems that gold and silver might be in progress to bottom out.

Confirmation is still needed, but the signs of approaching bottom are getting more apparent day by day.

However, we will concentrate on Gold more than Silver, as Gold managed to prove its strength over the past few months, while Silver lagged significantly and broke through key support areas.

Gold Is Hovering Around Its Trend Line

Gold prices failed to break above $1295 twice this year, leading to a notable sell-off back in April and June of this year. Gold has been declining for three weeks now. The drop came on the back of a significant decline in political risk across Europe due to the French presidential elections.

However, this week’s decline came on the back of the bailout of two biggest Italian banks, in addition to the US Dollar short-lived strength at the beginning of this week.

Meanwhile, gold has been stabilizing around the same area since the beginning of this week, trading within a tight range between 1240 and 1250 for the past three days.

Since the start of the year until today, Gold downside retracement has been limited. Every time Gold declined after a notable rally; it was posting a bottom higher than the previous one. In short, Gold Higher Low formation is in place.

The previous bottom in May was around $1213, before it spiked to a new high of this year. Now the prices are around 1240, testing its uptrend line and still hanging above the previous bottom.

Does it mean that Gold is about to rally from here? There are two possible scenarios: first is a spike from here, given the fact that the US Dollar Index is suffering below 96.0 areas.

The second scenario would be a deeper retracement with a break of its trend support. This could lead to another leg lower, probably toward 1224, which would be the first immediate support followed by 1216.

The bullish outlook remains unchanged as long as gold continues to trade within the higher lows formation. Otherwise, gold would be at risk to visit 1220 once again.

Silver Is Lagging

Silver showed a significant sign of weakness over the past two months. First when it dropped all the way back to 16.0 down from this year’s high at 18.63, and it took 18 business days for such decline.

Despite the fact that Silver managed to rebound back to 17.60, it also failed to break above that resistance and dropped once again to 16.40.

Since then, Silver has been trading within a tight range between 16.80 and 16.40 with no clear break above or below those levels.

It’s obvious that Silver broke its uptrend line in April, and the pressure seems to be on the downside. Yet, there is still some sort of a last chance for silver around 16.20, which can be seen as a secondary trend line.

However, a break below that trend line would make way for a deeper decline toward December’s lows around 15.80’s and 15.60’s.