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Gold Price Rebound Brings Former Support Zone on Radar

Gold Price Rebound Brings Former Support Zone on Radar

David Song, Strategist

Gold Price Talking Points

The price of gold extends the rebound from the November low ($1765), with the Relative Strength Index (RSI) exhibiting a similar dynamic as the indicator bounces back from oversold territory, but the precious metal faces a key test going into the end of the week as it comes up against a former support zone.

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Gold Price Rebound Brings Former Support Zone on Radar

The price for bullionappears to be staging a V-shape recovery following failed attempt to test the July low ($1758), and the monthly opening range raises the scope for higher gold prices as the precious metal extends the series of higher highs and lows from the start of the week.

However, bullion seems to be moving to the beat of it own drum as the correction from the record high ($2075) looks to be a shift in market behavior rather than an exhaustion in the bullish trend, and the low interest rate environment along with ballooning central bank balance sheets may no longer provide a backstop as the price of gold no longer traders to fresh yearly highs during every single month in 2020.

Nevertheless, the US Dollar may continue to reflect an inverse relationship with investor confidence as major central banks rely on their unconventional tools achieve their policy targets, and recent remarks from Dallas Fed President Robert Kaplan, a 2020-voting member on the Federal Open Market Committee (FOMC), warns that the economic recovery could “stall out either by the end of this year or into the first quarter” during an interview with CNBC.

As a result, Kaplan argues that fiscal policy “can be more targeted and maybe more suited” than monetary policy to encourage a stronger recovery, but plans to “go into the December meeting with an open mind” as the Dallas Fed anticipates a “very solid year of growth” in 2021.

Looking ahead, the FOMC may continue to endorse a dovish forward guidance at its next interest rate decision on December 16 as Fed officials “assess how our ongoing asset purchases can best support our maximum employment and price-stability objectives as well as market functioning and financial stability, and key market trends may persist throughout the remainder of the year as Chairman Jerome Powell tells US lawmakers that the FOMC remains “committed to using our full range of tools to support the economy and to help assure that the recovery from this difficult period will be as robust as possible.”

Image of IG Client Sentiment report

At the same time, the tilt in retail sentiment may carry into 2021 as the net-long US Dollar bias from earlier this year resurfaces, with the IG Client Sentiment report showing traders net-long USD/CHF, USD/CAD and USD/JPY, while the crowd is net-short GBP/USD, AUD/USD, NZD/USD and EUR/USD.

With that said, the price of gold may continue to move to the beat of its own drum even though the US Dollar continues to show an inverse relationship with investor confidence, and the monthly opening range raises the scope for higher gold prices as the precious metal extends the series of higher highs and lows from the start of the week.

However, gold faces a key test as the price for bullion comes up against a former support zone, which may now act as resistance as the correction from the record high ($2075) looks to be a shift in market behavior rather than an exhaustion in the bullish trend.

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Gold Price Daily Chart

Image of 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 ($1891) 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.
  • The correction from the record high ($2075) now indicates a potential shift in market behavior rather than an exhaustion in the bullish trend as the price of gold trades at its lowest level since July, with the RSI highlighting a similar dynamic as it dips into oversold territory for the first time since 2018.
  • However, price of gold appears to have reversed course ahead of the July low ($1758) amid the failed attempt to test the $1754 (261.8% expansion) to $1762 (78.6% expansion) region, with the RSI reflecting a textbook buy signal as the indicator quickly crosses back above 30 and recovers from oversold territory.
  • The monthly opening range for December raises the scope for higher gold prices as the precious metal extends the series of higher highs and lows from the start of the week, with a break/close above the former support zone around $1847 (100% expansion) to $1857 (61.8% expansion) bringing the Fibonacci overlap around $1907 (78.6% expansion) to $1920 (161.8% expansion) back on the radar.
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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.

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