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Gold Prices Vulnerable as RSI Snaps Upward Trend

Gold Prices Vulnerable as RSI Snaps Upward Trend

David Song, Strategist

Gold Price Talking Points

The price of gold continues to track a narrow range after trading to a fresh 2020 high ($1818) earlier this month, but recent developments in the Relative Strength Index (RSI) warn of a potential pullback in bullion as the indicator snaps the upward trend carried over from the previous month.

Gold Prices Vulnerable as RSI Snaps Upward Trend

The price of goldhas traded to fresh yearly highs during every single month so far in 2020, and the bullish behavior may persist throughout the second half of the year as the Federal Reserve’s balance sheet expands for the first time in July.

Image of Federal Reserve balance sheet

The Fed’s balance sheet slipped below $7 trillion earlier this month, but the contraction 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.”

It seems as though the Fed will rely on its lending facilities along with its asset purchases to support the US economy as a growing number of officials shows little interest in adopting a yield caps or targets (YCT) policy, with New York Fed President John Williams, a permanent voting member on the FOMC, noting that yield curve control would be an option “in a situation where we found that our forward guidance and other communications isn’t being as effective as we would like.”

Recent comments from the FOMC suggest the central bank will retain the current policy as Governor Lael Brainard insists that it will be important for the Federal Reserve “to avoid the premature withdrawal of necessary support,” and the committee appears to be on track to carry out a wait-and-see approach over the coming monthsas the central bank moves to “the next phase of monetary policy.”

In turn, the FOMC may reiterate that the central bank remains “committed to using its full range of tools to support the U.S. economy” at the next interest rate decision on July 29, but it remains to be seen if Fed officials will alter the forward guidance in the second half of 2020 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.”

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, but recent developments in the Relative Strength Index (RSI) warn of a potential pullback in bullion as the indicator snaps the upward trend carried over from the previous month.

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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, but recent developments warn of a potential pullback in the price of gold as the indicator fails to produce the extreme readings seen in February and snaps the upward trend carried over from the previous month.
  • The string of failed attempts to break/close above the $1822 (50% expansion) region may continue to generate range bound conditions, 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.