Gold Forecast: Failure to Test Monthly Low Warns of Range Bound Prices

Gold Price Talking Points

The price of gold trades in a narrow range after failing to test the monthly low ($1873), but fresh remarks from Federal Reserve officials may influence the precious metal as it shows an inverse relationship with the US Dollar.

Gold Forecast: Failure to Test Monthly Low Warns of Range Bound Prices

The price of goldretains the opening range for October even though the US Dollar Index (DXY) appears to be reacting to a confluent zone of support, and the precious metal may continue to consolidate as the Federal Open Market Committee (FOMC) plans to unveil a “more explicit outcome-based forward guidance.”

In turn, the price of gold may work its way towards the monthly high ($1933) if FOMC officials show a greater willingness to further support the US economy, and key themes resulting from the COVID-19 pandemic may keep the precious metal afloat as the Fed’s balance sheet increases for the second week to approach the peak from June.

It remains to be seen if the decline from the record high ($2075) will turn out to be a change in market behavior or an exhaustion in the bullish trend as the price of gold no longer traders to fresh yearly highs during every single month in 2020, but the low interest environment along with the ballooning central bank balance sheets may continue to heighten the appeal of gold as an alternative to fiat-currencies as US lawmakers struggle to pass another round of fiscal stimulus.

As a result, the FOMC may come under pressure to deploy more unconventional tools as the deadlock in Congress raises the threat for a protracted recovery, and the price of gold may continue to reflect an inverse relationship with the US Dollar as Chairman Jerome Powell and Co. remain “committed to using the Federal Reserve's full range of tools in order to support the U.S. economy.”

Nevertheless, the IG Client Sentiment report largely reflects the net-long US Dollar bias from earlier this year as retail traders are net-long USD/CHF, USD/CAD and USD/JPY, while the crowd is net-short GBP/USD, NZD/USD and EUR/USD. However, the Australian Dollar has bucked the trend as retail interest flips in October, with 50.40% of traders currently net-long AUD/USD compared to 39.87% last week.

Looking ahead, key market themes may persist ahead of the next FOMC interest rate decision on November 5 as the central bank vows to “increase its holdings of Treasury securities and agency MBS (mortgage-backed securities) at least at the current pace,” and the price of gold may continue to consolidate after failing to test the monthly low ($1873) as it retains the opening range for October.

Gold Price Daily Chart

Source: Trading View

• The price of gold pushed to fresh yearly highs throughout the first half 2020, with the bullish price action also taking shape in August as the precious metal tagged a new record high ($2075).
• However, the bullish behavior failed to materialize in September as the price of gold traded below the 50-Day SMA ($1925) for the first time since June, with developments in the Relative Strength Index (RSI) negating the wedge/triangle formation established in August as the oscillator slipped to its lowest level since March.
• Nevertheless, the decline from the record high ($2075) may turn out to be an exhaustion in the bullish trend rather than a change in market behavior as the RSI reverses ahead of oversold territory and breaks out of the downward trend carried over from August.
• The price of gold may continue to consolidate amid the lack of momentum to test the monthly low ($1873), but a move back above the Fibonacci overlap around $1907 (100% expansion) to $1920 (161.8% expansion) may push bullion towards the monthly high ($1933), with the next area of interest coming in around $1956 (23.6% expansion).
• The RSI may continue to show the bearish momentum abating if it makes its way towards overbought territory, with a move above 70 likely to be accompanied by higher gold prices like the behavior seen in July.
• Need a break/close above $1956 (23.6% expansion) to bring the $1971 (100% expansion) to $1985 (261.8% expansion) region on the radar, with a move above the September high ($1993) opening up the overlap around $2016 (38.2% expansion) to $2025 (78.6% expansion).

--- Written by David Song, Currency Strategist

Follow me on Twitter at @DavidJSong