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Gold Holds Near 2020 High as Fed Main Street Program Goes Operational

Gold Holds Near 2020 High as Fed Main Street Program Goes Operational

David Song,
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Gold Price Talking Points

The price of gold appears to be stuck in a narrow range after trading to a fresh 2020 high ($1789) at the start of the month, but current market conditions may keep the precious metal afloat as the Boston Federal Reserve announces that the Main Street Lending Program is now “fully operational.”

Gold Holds Near 2020 High as Fed Main Street Program Goes Operational

The price of gold has traded to fresh yearly highs during every single month so far in 2020, and the bullish behavior may persist throughout July as the Relative Strength Index (RSI) carves a upward trend and approaches overbought territory.

The kneejerk reaction tothe US Non-Farm Payrolls (NFP) report suggests upcoming data prints may do little to influence the price of gold as the Federal Open Market Committee (FOMC) vows to “increase its holdings of Treasury securities and agency MBS (Mortgage-Backed Security) and agency CMBS (Commercial Mortgage-Backed Security) at least at the current pace.”

It seems as though the FOMC will continue to endorse a dovish forward guidance despite the ongoing improvement in the labor market as “various participants noted that the economy is likely to need support from highly accommodative monetary policy for some time.”

The comments suggest the FOMC will continue to utilize its balance sheet along with its lending facilities even though the Summary of Economic Projections (SEP) reflect “a general expectation of an economic recovery beginning in the second half of this year,” and it remains to be seen if Chairman Jerome Powell and Co. will alter the forward guidance as Fed officials insist that “it will be important in coming months for the Committee to provide greater clarity regarding the likely path of the federal funds rate and asset purchases.”

In turn, the FOMC may stick to the same script at the next interest rate decision on July 29as “fiscal support for households, businesses, and state and local governments might prove to be insufficient,”and the recent contraction in the Federal Reserve’s balance sheet may end up being short lived as the reduction is largely driven by a decline in liquidity swaps.

With that said, the low interest rate environment along with the ballooning central bank balance sheets may continue to act as a backstop for the price of gold as market participants look for an alternative to fiat-currencies.

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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 from February.
  • In turn, gold cleared the March high ($1704) to tag a new yearly high ($1748) in April, with the bullish behavior also taking shape in May as the precious metal traded to a fresh 2020 high ($1765).
  • The bullish behavior carried into June as the reversal from the May low ($1670) produced a break of the monthly opening range and pushed the price of bullion to a fresh 2020 high ($1786), with the trend also taking shape in July as the precious metal tags a fresh yearly high ($1789).
  • The move above the May high ($1765) brings the 2012 high ($1796) back on the radar, but still waiting for a break/close above the $1786 (38.2% expansion) region to open up the topside hurdles, with the next area of interest coming in around $1803, the November 2011 high, followed by the $1822 (50% expansion) region.
  • Will keep a close eye on the RSI as it establishes an upward trend and approaches overbought territory, with a break above 70 is likely to be accompanied by higher gold prices as the bullish momentum gathers pace.
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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.