Gold is setting up for a drop, according to the CitiFX Technicals team led by Tom Fitzpatrick. The group warns a double top pattern has been confirmed, and that the precious metal should fall more than 6% from here.
“The key level at $1,214, which was the double top neckline, has given way on a weekly close basis,” according to the team. “The setup points towards a move to $1,133.”
A drop to 1,133 would push the precious metal into negative territory for 2017. Citi says gold should find support in near $1,121.
Gold has rallied about 5.5% so far in 2017, even as the Federal Reserve has continued on its path to normalize interest rates. The yellow metal topped out just shy of the $1,300 level in both April and June, right around the time of the Fed’s last two rate hikes.
Potentially limiting the precious metal has been the rise of cryptocurrencies. According to Tom Lee, the managing partner and head of research at Fundstrat Global Advisors, bitcoin and ethereum are “cannibalizing demand for gold.”
“Bitcoin is arguably becoming a scarcer store of value,” Lee wrote in a note to clients sent out on Friday. “Investors need to identify strategies to leverage this potential rise in cryptocurrencies.”
The two cryptocurrencies have respectively gained 172% and 3,200% year-to-date as of Friday. Currently, bitcoin has an aggregate value of $42 billion, but Lee believes if that grows to $500 billion central banks could become buyers.
“Already central banks have looked into this possibility,” Lee says. “In our view, this is a game changer, enhancing the legitimacy of the currency and likely accelerating the substitution for gold.”