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Gold Rally Outpaced by Silver While Net Long USD Exposure Persists

Gold Rally Outpaced by Silver While Net Long USD Exposure Persists

2020-07-22 05:00:00
David Song, Strategist

Gold Price Talking Points

The price of gold trades to a fresh 2020 high ($1866) as the crowding behavior in the US Dollar persists, and current market conditions may keep the precious metal afloat as the Relative Strength Index (RSI) pushes into overbought territory for the third time this year.

Gold Rally Outpaced by Silver While Net Long USD Exposure Persists

The price of goldhas traded to fresh yearly highs during every single month so far in 2020, and recent developments in the RSI suggest the bullish momentum will gather pace as the indicator breaks above 70 for the third time in 2020.

The extreme reading in the RSI is likely to be accompanied by higher gold prices amid the behavior seen in February, and the bullish price action may persist throughout the second half of the year as the Federal Reserve relies on its lending facilities as well as its asset purchases to support the US economy.

It seems as though the Federal Open Market Committee (FOMC) will widen the size and scope of its asset purchase programs if the US economy requires additional monetary support amid the lack of interest in adopting a yield caps or targets (YCT) policy, and the contraction in the Fed’s balance sheet may prove to be short lived as the central bank 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.”

Current market conditions have not only benefitted gold, but the price of silver has now outpaced bullion, with silver trading approximately 25% higher from the start of the year, while gold has gained 22% so far in 2020. The development has sparked a material decline in the gold-silver ratio, with the price of silver on track to validate the break of a 40-year continuation pattern.

At the same time, the price of copper reflects a similar dynamic as it trades to a fresh 2020 high (2.99) in July, with the rally triggering an extreme reading in the RSI, and the unprecedented efforts by the FOMC may keep precious metals afloat as the US Dollar gives back the advance following the COVID-19 outbreak. with

Image of IG Client Sentiment

Nevertheless, the IG Client Sentiment report continues to show crowding behavior in the US Dollar even though the DXY indexcontinues to track the downward trend from the March high (102.99), with retail traders still net-long USD/CHF, USD/JPY and USD/CAD, while the crowd remains net-short GBP/USD, NZD/USD, AUD/USD and EUR/USD.

It remains to be seen if the net-long US Dollar exposure will persist ahead of the next FOMC meeting interest rate decision on July 29 as US lawmakers attempt to nail out another fiscal stimulus package over the coming days, but 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 ($1866).
  • The price of gold cleared the 2012 high ($1796) as the Relative Strength Index (RSI) established an upward trend in June, with the recent strength in the price of gold pushing the indicator into overbought territory for the third time this year even though it snapped the upward trend carried over from the previous month.
  • The extreme reading in the RSI is likely to be accompanied by higher gold prices amid the price action seen in February, and the bullish behavior may persist as long as the indicator holds above 70.
  • Need a close above the $1857 (61.8% expansion) region to open up the Fibonacci overlap around $1907 (78.6% expansion) to $1920 (161.8% expansion), which largely lines up with the record high price recorded in September 2011 ($1921).
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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.