Gold Price Rally Susceptible to Looming RSI Sell Signal

Gold Price Talking Points

The price of gold pulls back from a fresh weekly high ($1917) as the 10-Year US Treasury yield attempts to push back above the 50-Day SMA (1.63%), and looming developments in the Relative Strength Index (RSI) may indicate a textbook sell signal for bullion if the oscillator slips below 70.

Gold Price Rally Susceptible to Looming RSI Sell Signal

The price of gold seemed to be on track to test the January high ($1959) after taking out the February high ($1872) in May, but fresh data prints coming out of the US economy appear to be weighing on the precious mental as the ISM Manufacturing survey prints at 61.2 in May versus forecasts for a 60.9 reading.

Looking ahead, the Non-Farm Payrolls (NFP) report may influence the near-term outlook for bullion as the update is projected to show a 664K rise in May following the 226K expansion the month prior, while the Unemployment Rate is expected to narrow to 5.9% from 6.1% during the same period. As a result, signs of a stronger labor market may dampen the appeal of gold as it encourages the Federal Reserve to scale back the dovish forward guidance for monetary policy.

It seems as though the Federal Open Market Committee (FOMC) will gradually change its tone over the coming months as “a number of participants suggested that if the economy continued to make rapid progress toward the Committee's goals, it might be appropriate at some point in upcoming meetings to begin discussing a plan for adjusting the pace of asset purchases,” and it remains to be seen if Chairman Jerome Powell and Co. will adjust the forward guidance at its next interest rate decision on June 16 as Fed officials are slated to update the Summary of Economic Projections (SEP).

Until then, the price of gold may stay afloat as the FOMC insists that “that the economy was still far from the Committee's longer-run goals,”but speculation for a looming change in Fed policy may underpin longer-dated US Treasury yields as the central bank pledges to clearly communicate “its assessment of progress toward its longer-run goals well in advance of the time when it could be judged substantial enough to warrant a change in the pace of asset purchases.”

With that said, the price of gold appeared to be on track to test the January high ($1959)after taking out the February high ($1872) in May, but the Relative Strength Index (RSI) may indicate a textbook sell signal for bullion if the oscillator slips below 70.

Gold Price Daily Chart

Source: Trading View

• Keep in mind, 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 ($1796) 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, a double-bottom emerged in 2021 as the price of gold failed to test the June 2020 low ($1671), with the key reversal pattern pushing the precious metal back above the 200-Day SMA ($1842) for the first time since February.
• The price of gold may continue to retrace the decline from the start of the year after taking out the February high ($1872) in May, but need a close above the Fibonacci overlap around $1907 (78.6% expansion) to $1929 (23.6% expansion) to bring the January high ($1959) on the radar.
• The failed attempts to break/close above the Fibonacci overlap around $1907 (78.6% expansion) to $1929 (23.6% expansion) may generate a larger pullback in the price of gold as the RSI is on the cusp of indicating a textbook sell signal, with a move below 70 in the oscillator raising the scope for a move towards the $1857 (61.8% expansion) region as the bullish momentum abates.

--- Written by David Song, Currency Strategist

Follow me on Twitter at @DavidJSong