Retail traders' bullishness is actually bearish for gold - 23/08/2023

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As gold has strung together weeks of price declines, retail traders have become only more bullish on the precious metal’s prospects, and this could itself constitute a bearish signal, according to DailyFX currency analyst Daniel Dubrovsky.

“Gold prices concluded a fourth consecutive week of losses this past Friday,” Dubrovsky said. “In fact, so far this month, the yellow metal is down about 3.6 percent. That marks the worst performance since February. In response, retail traders have become increasingly bullish gold.”

Dubrovsky said the IG Client Sentiment (IGCS) indicator offers a clear illustration of this. “IGCS tends to function as a contrarian indicator,” he said, and asks “could further pain be in store for XAU/USD?”

Dubrovsky noted that according to the IGCS, about 81% of retail traders are net-long gold. “Since most of them are biased to the upside, this hints that prices may continue to fall,” he said. “This is as upside exposure increased by 4.02% and 6.91% compared to [Aug. 20] and last week, respectively. With that in mind, this offers a stronger bearish contrarian trading bias for gold.”

Turning to gold’s daily price chart, Dubrovsky said that the precious metal “continues to make further downside progress under the rising trendline from February,” which reinforces an increasingly bearish technical conclusion, even as “a falling trendline from April maintains the broader downside focus.”

Going forward, Dubrovsky said that immediate resistance is found at the 38.2% Fibonacci retracement level of $1903. “Pushing above this price may open the door to revisiting the falling trendline, which could reinstate a downside focus,” he said. “Otherwise, extending losses places the focus on support which is the midpoint of the Fibonacci retracement at 1848.”

Spot gold last traded at $1897.07, up 0.12% on the session.