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Gold Price Analysis: Fed Capitulation & Central Bank Buying Spree Maintains Bullish Outlook

Gold Price Analysis: Fed Capitulation & Central Bank Buying Spree Maintains Bullish Outlook

2019-01-31 12:00:00
Justin McQueen, Analyst
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Gold Price Analysis and Talking Points:

  • Fed Capitulation as Doves are Set Free
  • Central Bank Gold Buying Provides Fundamental Support
  • Outlook Bullish, However, Technical Hurdles May Hold for Now

See our quarterly gold forecast to learn what will drive prices throughout Q1!

Fed Capitulation as Doves are Set Free

The Federal Reserve doves have been set free following yesterday’s rate decision and Powell’s presser. Gold prices pushed higher, hitting highs of $1323 following the decision, in which the central bank reemphasised patience regarding rate hikes, having removed gradual rate hikes from its guidance. Consequently, markets have now called the end to the rate hiking cycle, however, what is maybe more interesting is that the Fed highlighted that they are prepared to adjust the details for completing its balance sheet normalisation in light of economic and financial developments. As such, this suggests that the Fed could halt their balance sheet unwind earlier than expected. What has been made apparent since the last Fed meeting is that markets are indeed dictating monetary policy.

Central Bank Gold Buying Provides Fundamental Support

Alongside a Fed U-turn in monetary policy, gold has also found fundamental support from the buying spree by central banks. The World Gold Council recently reported that central banks had been buying gold at the strongest pace in over 50yrs throughout 2018, with purchases amounting to 15% of gold demand. In turn, given that the risks to the global economic outlook continues to tilt to the downside, central bank demand for gold may continue to provide underlying support to the precious metal.

Outlook Bullish, However, Technical Hurdles May Hold for Now

While we remain bullish on the gold, short term indicators continue to signal a potential pullback. The RSI on the daily-time frame confirms a negative divergence, while remains in overbought territory, while the on the weeklies, the RSI has pushed into the overbought zone. Having broken above $1318, eyes are now on for a resistance at $1325/oz (May 2018). A closing break above however, increases scope for a test of $1360 in the longer term.

What You Need to Know About the Gold Market

GOLD PRICE CHART: Daily Time-Frame (Apr 2018-Jan 2019)

Gold Price Analysis: Fed Capitulation & Central Bank Buying Spree Maintains Bullish Outlook

Chart by IG

GOLD TRADING RESOURCES:

--- Written by Justin McQueen, Market Analyst

To contact Justin, email him at Justin.mcqueen@ig.com

Follow Justin on Twitter @JMcQueenFX

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