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Gold Price Carves Lower Highs and Lows Amid Plans to Reopen US Economy

Gold Price Carves Lower Highs and Lows Amid Plans to Reopen US Economy

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Gold Price Talking Points

Gold continues to pull back from the yearly high ($1748) even though the International Monetary Fund (IMF) forecasts global growth to contract 3.0% in 2020, and the price for bullion may face a larger correction as it carves a series of lower highs and lows.

Gold Price Carves Lower Highs and Lows Amid Plans to Reopen US Economy

The price of gold fails to test the November 2012 high ($1754)as the Trump administration outlines a three-phased approach to reopen the US economy, and the bullish momentum may continue to abate over the coming days as the Relative Strength Index (RSI) reverses course ahead of overbought territory.

Hopes of a V-shaped recovery appear to be dampening the appeal of gold as St. Louis Fed President James Bullard insists that “it is entirely possible and feasible we can get past the crisis mostly in the second quarter,” and a growing number of Federal Reserve officials may adopt an improved outlook as the central bank takes unprecedented steps to combat the economic shock from COVID-19.

However, New York Fed President John Williams, a permanent voting-member on the Federal Open Market Committee (FOMC), warns of a protracted recovery as “it's going to take longer to get us back to where we want to be.” Mr. Williams went onto say that “I don't see the economy being back to full strength by the end of the year”during an interview with CNBC, and the weakening outlook for growth may force the FOMC to retain a dovish forward guidance at its next interest rate decision on April 29 as the IMF sees the US economy contracting 5.9% in 2020.

It remains to be seen if the FOMC will continue to push monetary policy into uncharted territory as the committee “remainscommitted to using its full range of tools to support the flow of credit to households and businesses to counter the economic impact of the coronavirus pandemic,” but the unprecedented response may ultimately lead to unintended consequences as the Fed relies on its balance sheet to cushion the US economy.

With that said, the low interest rate environment may continue to act as a backstop for goldas marketparticipants look for an alternative to fiat-currencies, and the broader outlook for bullion remains constructive as the reaction to the former-resistance zone around $1450 (38.2% retracement) to $1452 (100% expansion) helped to rule out the threat of a Head-and-Shoulders formation, with a similar scenario arising in March as the price of gold reversed course from the monthly low ($1451).

However, the price of bullion may continue to pullback from the yearly high ($1748) as it initiates a series of lower highs and lows, while the Relative Strength Index (RSI) reverses course ahead of overbought territory.

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Gold Price Daily Chart

Image of gold price daily chart

Source: Trading View

  • The opening range for 2020 instilled a constructive outlook for the price of gold as the precious metal cleared the 2019 high ($1557), with the Relative Strength Index (RSI) pushing into overbought territory during the same period.
  • A similar scenario materialized in February, with the price of gold marking the monthly low ($1548) during the first full week, while the RSI broke out of the bearish formation from earlier this year to push back into overbought territory.
  • However, the monthly opening range for March as less relevant amid the pickup in volatility, with the decline from the monthly high ($1704) leading to a break of the January low ($1517).
  • Nevertheless, the reaction to the former-resistance zone around $1450 (38.2% retracement) to $1452 (100% expansion) instilled a constructive outlook for bullion especially as the RSI reversed course ahead of oversold territory and broke out of the bearish formation carried over from the previous month.
  • The break/close above $1710 (100% expansion) pushed the price of gold to a fresh yearly high ($1748), but the precious metal struggles to retain the advance from earlier this month following the failed the November 2012 high ($1754).
  • The Relative Strength Index (RSI) highlights similar dynamic as the oscillator fails to push above 70 and flops ahead of overbought territory.
  • The string of failed attempt to close above the Fibonacci overlap around $1733 (78.6% retracement) to $1739 (100% expansion) has pushed the price of gold back towards the $1676 (78.6% expansion) region, with the next area of interest coming in around $1655 (78.6% expansion).
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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.