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Gold Price Forecast: Extreme RSI Reading to Offer Bullish Signal

Gold Price Forecast: Extreme RSI Reading to Offer Bullish Signal

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 ($1818) earlier this month, but the Relative Strength Index (RSI) may offer a bullish signal if the indicator produces the extreme readings seen in February.

Gold Price Forecast: Extreme RSI Reading to Offer Bullish Signal

The price of goldhas traded to fresh yearly highs during every single month so far in 2020, and the bullish behavior may persist even though the Federal Reserve’s balance sheet slips below $7 trillion in July as the RSI clings to the upward trend from June and continues to flirt with overbought territory.

Image of Federal Reserve balance sheet

Source: FOMC

Looking ahead, the contraction in the Federal Reserve’s balance sheet may prove to be short lived as the Federal Open Market Committee (FOMC) remains “committed to using its full range of tools” and 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.”

However, the FOMC appears to be in no rush to provide additional monetary support as officials shows little interest in adopting a yield caps or targets (YCT) policy, and it remains to be seen if the central bank will alter the forward guidance as Chairman Jerome Powell and Co. agree 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.”

A recent speech by Fed Governor Lael Brainard suggests the central bank will carry out a wait-and-see approach as the FOMC voting member insists that “it likely will be appropriate to shift the focus of monetary policy from stabilization to accommodation by supporting a full recovery in employment and a sustained return of inflation to its 2 percent objective.”

Nevertheless, Brainard warns that “the earlier-than-anticipated resumption in activity has been accompanied by a sharp increase in the virus spread in many areas,” with the official emphasizing that “some high-frequency indicators tracked by Federal Reserve Board staff (including mobility data and employment in small businesses) suggest that the strong pace of improvement in May and the first half of June may not be sustained.”

In turn, Brainard argues that it will be important for the Federal Reserve “to avoid the premature withdrawal of necessary support,” and it seems as though the FOMC will rely on its lending facilities along with its asset purchases to support the US economy as the central bank moves to “the next phase of monetary policy.”

At the same time, Dallas Fed President Robert Kaplan, a 2020-voting member on the FOMC, warns that “the rebound that we expected at the end of the second quarter and in the third quarter is stalling somewhat” on the back of the growing number of COVID-19 cases, and went onto say that “with the unemployment rate so high, some form of extension of unemployment benefits is going to be critical” during an interview with CNBC.

The remarks indicate the FOMC will retain a dovish forward guidance at the next interest rate decision on July 29 even though US lawmakers mull another COVID-19 recovery bill, and 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 technical outlook for the price of gold remains constructive as it trades to fresh yearly highs during every single month so far in 2020, with the bullish behavior also taking shape in July as precious metal tags a new 2020 high ($1818).
  • The price of gold cleared the 2012 high ($1796) as the Relative Strength Index (RSI) established an upward trend in June, and the oscillator may offer a bullish signal if it rebounds from trendline support and produces the extreme readings seen in February as a break above 70 would indicate that the bullish momentum is gathering pace.
  • Still need a break/close above the $1822 (50% expansion) region to open up the $1857 (61.8% expansion) area, but lack of momentum to hold above $1786 (38.2% expansion) may generate a larger pullback in the price of gold, with the first area of interest coming in around $1754 (261.8% expansion) followed by the Fibonacci overlap around $1733 (78.6% retracement) to $1743 (23.6% expansion).

--- 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.