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Gold Price Talking Points

The price of gold may continue to exhibit a bullish behavior as it clears the August 2013-high ($1434), but fresh comments coming out of the Federal Reserve appear to be rattling the near-term rally as central bank officials tame bets for a rate cutting cycle.

Gold Price Rally Stalls as Fed Officials Endorse ‘Insurance Cut’

The surge in the price of gold following the Federal Reserve meeting indicates a material change in market behavior as the adjustments to the Summary of Economic Projections (SEP) fuel bets for lower US interest rates.

Even though US President Donald Trump is scheduled to meet with China President Xi Jinping at the Group of 20 (G20) summit scheduled for later this week, it may only be a matter of time before the Federal Open Market Committee (FOMC) reverses the four rate hikes from 2018 as the “apparent progress on trade turned to greater uncertainty.”

Image of Fed Fund futures

In turn, Fed Fund futures continue to reflect a 100% probability for a 25bp reduction at the next interest rate decision on July 31, and gold prices may continue to benefit from the current environment if a growing number of Fed officialsproject a lower trajectory for the benchmark interest rate.

However, comments from St. Louis Fed President James Bullard, a 2019 voting member on the FOMC, suggest the central bank will insulate the US economy with an “insurance cut” as the official insists that a reduction of “50 basis points would be overdone.”

Moreover, Chairman Jerome Powell points out that the baseline outlook for the US economy “remains favorable,” and it seems as though the FOMC will take a more reactionary approach in managing monetary policy as the central bank head pledges to “closely monitor the implications of incoming information for the economic outlook and will act as appropriate to sustain the expansion.”

With that said, details of a US-China trade deal may ultimately lead to a minor adjustment in monetary policy, but Chairman Powell and Co. may have little choice but to reestablish a rate cutting cycle as the Trump administration continues to rely on tariffs and sanctions to push its agenda.

As a result, speculation for an imminent change in regime may keep the price of gold afloatespecially as the break of the February-high ($1347) negates the threat of a head-and-shoulders formation. However, the advance from earlier this month appears to be getting exhausted as gold prices fail to extend the recent series of higher highs and lows from the previous week.

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Gold Price Daily Chart

Image of gold daily chart
  • Keep in mind, the broader outlook for gold is no longer mired by a head-and-shoulders formation as both price and the Relative Strength Index (RSI) break out of the bearish trends from earlier this year.
  • However, the near-term rally in the bullion appears to have stalled ahead of the Fibonacci overlap around $1444 (161.8% expansion) to $1457 (100% expansion) as gold prices fail to extend the series of higher highs and low from the previous week.
  • Will keep a close eye on the RSI as it falls back from an extreme reading, with the oscillator at risk of flashing a textbook sell-signal over the coming days if it crosses below 70.
  • Need a break/close $1402 (78.6% expansion) to bring the downside targets back on the radar, with the first area of interest coming in around $1380 (100% expansion) to $1385 (78.6% expansion) followed by the $1358 (78.6% expansion) to $1360 (61.8% expansion) region.

For more in-depth analysis, check out the 2Q 2019 Forecast for Gold

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--- Written by David Song, Currency Strategist

Follow me on Twitter at @DavidJSong.