Gold Price Talking Points:
- Gold prices continue to outperform as one of the few bright spots in global markets.
- Gold prices remain overbought but given the continuation of fear, overbought readings have mattered little.
- As the FOMC is expected to get even more loose and passive, and with the Fed’s blackout period starting tomorrow, a continuation of fear could propel Gold prices even-higher.
Gold Goes Ballistic as Fear Grips Global Markets
Gold prices gained as much as 6.6% this week as risk aversion continued to show. This reversed the entirety of last week’s loss and, after opening the week with a hold of support on Monday, buyers came back in droves upon the announcement of the FOMC’s emergency rate cut on Tuesday morning.
As expectations for even more cuts continue to get priced into markets, with, perhaps even a return to QE on the cards for the Federal Reserve; the topside of Gold prices has continued to shine – and Gold price action has pushed right back up to a key area of resistance on the chart as taken from the 14.4% retracement of the 1999-2011 major move.
Gold Price Monthly Chart
Chart prepared by James Stanley; Gold on Tradingview
Gold Prices Are Overbought – But How Much Does That Mean During Panic?
As discussed on Thursday and then again on Friday, the primary driver of the past two weeks’ worth of volatility appears to emanate from fears around Coronavirus. And not even necessarily Coronavirus itself, as so much remains unknown, but more related to fears of a panic, itself, creating a bit of panic.
The move in US Treasuries has been historic in scope: The Ten-Year Note fell to a record low yield and not by a small stretch. The prior record low in the 10-year was 1.325%, set in 2016. This morning, that yield touched down to a low of .66%. The 30-year Treasury Bond previously had an all-time-low of 2.1%, also set in 2016. This morning, that touched down to 1.21%.
So clearly there is considerable fear throughout global financial markets that isn’t entirely explained by the 16% pullback in the S&P 500; and these are all drives that could further benefit the long side of Gold as investors and traders duck for safe-harbors as a big unknown risk fast approaches on the horizon.
While we don’t know entirely what Coronavirus will entail: We’re not yet positive on the R0 nor do we have enough cases outside of China to establish a mortality rate; we do know that fears around the spread of the virus have created business disruptions and economic slowdowns. And this appears to be the driving force to this recent round of risk aversion; along with an explainable reason why Gold prices have been so incredibly strong despite the deep overbought readings that continue to show.
Gold Weekly Price Chart
Chart prepared by James Stanley; Gold on Tradingview
Gold Price Strategy
Gold prices are overbought, that is no secret. And global markets are on edge, that also is not an ‘unknown.’ What is uncertain, however, is just how bad Coronavirus might turn out to be. Another certainty that can be drawn from that unknown variable, however, is the manner in which the Fed will likely respond to this or any other exogenous pressures: And that’s with even more loose monetary policy and, potentially even another appearance of Quantitative Easing.
While this may sound outlandish given that we had a rate hike out of the bank just 15 months ago, the fact of the matter is that Federal Reserve monetary policy remains a gigantic question mark as the ‘data dependency’ of the bank during the Yellen tenure seems to have went out of the window.
For next week, the technical forecast on Gold will be set to bullish; but traders are likely going to want to approach this with caution given the overbought context.
Gold Price Technical Forecast: Bullish
There are two primary manners of approach for a situation such as we have in Gold prices, at the moment; with an overbought trend trading at or near highs while a resistance level is in place. The trader can either a) look for breakouts in the direction of the move or b) try to be patient, wait for a pullback, and then look to buy-in at a higher-low.
Given how aggressive this move has priced-in of recent, that look for higher-low support requires a bit of projection; and on the below chart, three such zones are identified as potential support for Gold in the week ahead.
Bullish breakouts can look for follow-through resistance at the 1700 marker followed by: 1714, 1733, 1742 and then the 2012/2013 swing-high around the 1790 marker.
Gold Price Four Hour Chart
Chart prepared by James Stanley; Gold on Tradingview
--- Written by James Stanley, Strategist for DailyFX.com
Contact and follow James on Twitter: @JStanleyFX
