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Gold Rally Eyes Record High Price as RSI Pushes Into Overbought Zone

Gold Rally Eyes Record High Price as RSI Pushes Into Overbought Zone

David Song,
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Gold Price Talking Points

The price of gold extends the series of higher highs and lows from earlier this to trade to a fresh 2020 high ($1898), and the bullish price action may persist ahead of the Federal Reserve interest rate decision on July 29 as the Relative Strength Index (RSI) pushes deeper into overbought territory.

Gold Rally Eyes Record High Price as RSI Pushes Into Overbought Zone

The price of goldhas traded to fresh yearly highs during every single month so far in 2020, and the precious metal appears to be on track to test the record high set in September 2011 ($1921) as the RSI pushes above 70 for the third time in 2020.

The extreme RSI reading is likely to keep gold prices afloat amid the behavior seen in February, and bullion may exhibit a bullish behavior 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.

Looking ahead, the Federal Open Market Committee (FOMC) looks poised to retain the current policy on July 29 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,” and it seems as though Chairman Jerome Powell and Co. will expand 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.

Image of IG Client Sentiment

At the same time, it remains to be seen if the crowding behavior in the US Dollar will persist ahead of the FOMC interest rate decision as the IG Client Sentiment report continues to show retail traders net-long USD/CHF, USD/CAD and USDJPY, while the crowd remains net-short NZD/USD, GBP/USD, AUD/USD and EUR/USD.

The net-long US Dollar exposure persists even though the DXY index continues to track the downward trend from the March high (102.99), 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 ($1898).
  • 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.
  • The close above the $1857 (61.8% expansion) region brings the Fibonacci overlap around $1907 (78.6% expansion) to $1920 (161.8% expansion) on the radar, which largely lines up with the record high price recorded in September 2011 ($1921), with the next area of interest coming in around $1971 (100% expansion) to $1985 (261.8% 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.