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Gold Price May Attempt to Break Out Amid Failure to Test Monthly Low

Gold Price May Attempt to Break Out Amid Failure to Test Monthly Low

David Song,
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Gold Price Talking Points

The price of gold remains stuck in a narrow range as the US and China appear to be on track to reach a trade deal, but recent price action limits the downside risk for the precious metal as the former-resistance zone around $1447 (38.2% expansion) to $1457 (100% expansion) offers support.

Gold Price May Attempt to Break Out Amid Failure to Test Monthly Low

The price of gold struggles to retain the rebound from earlier this week amid growing hopes for a US-China trade deal, and the precious metal may continue to consolidate over the remainder of the month as President Donald Trump insists that the negotiations are “going very well.”

President Trump went onto say that “I’m holding it up because it’s got to be a good deal,” and it remains to be seen if the US and China will strike a deal before the Trump administration implements additional tariffs on December 15.

Hopes for an imminent trade deal may quickly fade as President Trump shows little intention of rolling back tariffs and signs the Hong Kong Human Rights and Democracy Act of 2019 “out of respect for President Xi, China, and the people of Hong Kong.”

The bill may push Chinese officials to retaliate as Foreign Ministry Spokesperson, Geng Shuang, warns that “China condemns and strongly opposes the US Congress passing the Hong Kong Human Rights and DemocracyAct.” Growing tensions between the US and China may become a growing concern for the Federal Reserve as “weakness in global growth and trade developments have weighed on the economy and pose ongoing risks.”

Nevertheless, recent remarks from Fed Governor Lael Brainard suggests the Federal Open Market Committee (FOMC) will take a break from its rate easing cycle as “there are good reasons to expect the economy to grow at a pace modestly above potential over the next year or so.”

In turn, Governor Brainard pledged to watch “the data carefully for signs of a material change to the outlook that could prompt me to reassess the appropriate path of policy,” and it seems as though the FOMC will retain the current policy at its last meeting for 2019 as “this is an important time to review our monetary policy strategy, tools, and communications in order to improve the achievement of our statutory goals.”

However, Chairman Jerome Powell and Co. may take additional steps to insulate the US economy in 2020 as the FOMC Minutes revealed that “many participants continued to view the downside risks surrounding the economic outlook as elevated.”

Image of Federal Reserve interest rate forecast

As a result, the Fed may continue to adjust the forward guidance for monetary policy when the central bank updates the Summary of Economic Projections (SEP) in December, and another downward revision in the interest rate dot-plot may heighten the appeal of gold as market participants look for a hedge against fiat currencies.

With that said, headlines surrounding the US-China trade negotiations may continue to influence the near-term outlook for gold prices, but the reaction to the former-resistance zone around $1447 (38.2% expansion) to $1457 (100% expansion) helps to rule out the threat of a Head-and-Shoulders formation as the region appears to be acting as support.

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Gold Price Daily Chart

Image of gold price daily chart

Source: Trading View

  • Keep in mind, 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, the near-term correction in the price for gold has been accompanied by a bearish formation in the RSI, with the pattern offering a mixed signal as a bull flag formation also takes shape.
  • With that said, the reaction to the Fibonacci overlap around $1447 (38.2% expansion) to $1457 (100% expansion) helps to rule out the threat of a Head-and-Shoulders formation as the former-resistance zone appears to be acting as support.
  • May see gold attempt to break out of the range bound price action from earlier this week as the precious metal holds above the monthly low ($1446).
  • Need a break/close above the $1509 (61.8% retracement) to $1517 (78.6% expansion) region to bring the topside targets on the radar, with the first topside hurdle comes in around $1554 (100% expansion), which largely lines up with the yearly-high ($1557).

For more in-depth analysis, check out the 4Q 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.