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Gold Price Forecast: Head-and-Shoulders Formation Takes Shape

Gold Price Forecast: Head-and-Shoulders Formation Takes Shape

2019-09-30 05:00:00
David Song, Strategist

Gold Price Talking Points

The price of gold appears to be on track to test the monthly-low ($1483) as a head-and-shoulders formation takes shape, but the growing divide at the Federal Reserve may keep the precious metal afloat amid the threat of a policy error.

Gold Price Forecast: Head-and-Shoulders Formation Takes Shape

Gold continues to give back the advance following Federal Open Market Committee (FOMC) interest rate decision, and a more pronounced correction may take shape over the coming days as Fed officials see the benchmark interest rate around 1.50% to 1.75% ahead of 2020.

Image of Fed interest rate forecast

The Summary of Economic Projections (SEP) foreshadow a further adjust in the benchmark interest rate, but it remains to be seen if the FOMC will reverse the four rate-hikes from 2018 as Governor Randal Quarlesinsists that “the US economy is quite solid.”

Recent remarks from Governor Quarles indicate a widening divide at the central bank as the permanent voting-member on the FOMC insists that “we don’t need to be overly concerned about the current level of inflation, that we are a few tenths of a point short of meeting our 2% inflation target.

At the same time, Philadelphia Fed President Patrick Harker voiced his opposition to the back-to-back rate cuts, with the 2020-voting member going onto say that the Fed Fund rate is “probably pretty close to neutral, if not at” neutral.

The comments suggest the FOMC will take a more patient approach than its counterparts in responding to the slowdown in global growth, and fresh data prints coming out of the US economy may encourage the central bank to revert to a wait-and-see approach as the Non-Farm Payrolls (NFP) report is anticipated to show a 145K expansion in September.

Image of Fed Fund futures

With that said, Fed Fund futures continue to reflect a 50/50 chance for another 25bp reduction on October 30, but the growing dissent among Fed officials may push market participants to hedge against fiat-currencies amid the threat of a policy error.

Keep in mind, recent price action warns of a larger correction as a head-and-shoulders formation takes shape, with gold on track the test the monthly-low ($1483) as the Relative Strength Index (RSI) continues to track the bearish formation from June.

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Gold Price Daily Chart

Image of gold daily chart

Source: Trading View

  • The broader outlook for gold prices remain constructive as both price and the Relative Strength Index (RSI) clear the bearish trends from earlier this year, with the precious metal trading to a fresh yearly-high ($1557) in September.
  • However, recent developments in the RSI warns of a near-term correction in gold as the oscillator continues to track the downward trend from June, with recent price action raising the risk for a head-and-shoulders top.
  • In turn, the lack of momentum to hold above the Fibonacci overlap around $1509 (61.8% retracement) to $1517 (78.6% expansion) keeps $1488 (61.8% expansion) on the radar, with a break/close below the stated region raising the risk for a move towards $1468 (50% expansion).

For more in-depth analysis, check out the 3Q 2019 Forecast for Gold

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--- Written by David Song, Currency Strategist

Follow me on Twitter at @DavidJSong.

DailyFX provides forex news and technical analysis on the trends that influence the global currency markets.