Gold Forecast: Gold Tests Resistance, Can Bulls Bring the Break?
Gold Technical Forecast: Neutral
- Gold prices gained this week, helped along by the Wednesday FOMC rate decision.
- Gold prices are threatening a bullish breakout but, so far, buyers have been unable to test above the key level at the 50% retracement of the June sell-off.
- The analysis contained in article relies on price action and chart formations. To learn more about price action or chart patterns, check out our DailyFX Education section.
June was brutal for Gold, with the yellow metal losing as much as -8.7% in what turned out to be the worst month since November of 2016. And if we align drivers, what showed in June wasn’t necessarily all that different from what was doing the pushing five years ago, as jitters around potential FOMC moves had investors trying to see around that next corner.
In 2016, the Fed hiked in December of that year. And then thrice in 2017, and four times in 2018, making for some hasty adjustments after rates had sit near zero for the better part of the prior decade. So looking back, that bearish move in November of 2016 turned out to be quiet prescient, and reading the tea leaves from the June instance had some similarities as rampant inflation prints continued to drive the thought that the Fed may not have much more flexibility for long.
But July has shown a different picture: The Fed has went out of their way to illustrate just how dovish they are, and they seem to be very disinterested in policy normalization anytime soon, even with high-flying inflation numbers. At the most recent rate decision, Powell even showed bias towards the employment side of the Fed’s dual mandate, reiterating the ‘substantial further progress’ that the bank is going to want to see before even looking at nudging policy into a less dovish posture.
In Gold, this is pertinent because the dovish Fed speak through July helped prices to retrace 50% of that June sell-off. The 50% marker of that prior major move came in as resistance mid-month and again last week after Powell spoke as part of the Fed’s July rate decision.
Gold Four-Hour Price Chart
As I had looked at after that FOMC rate decision, price action jumping right back to that resistance opened the door for bullish breakout potential in Gold. The driver here would be expectations for the Fed to stay loose and passive until, hopefully, inflation tames and proves to be more transitory.
There’s another push factor here, however, and this is something that’s been on full display so far in July and it’s also something that the Fed has admitted to not having an answer for: Treasury yields. Despite the Fed’s continued optimism in the recovery, US yields continue to tank with the 10 year setting a fresh five month low again last week.
This had many scratching their heads, wondering how Treasuries could be so well bid if we are, in fact, seeing continued hope in the recovery. But perhaps the more foreboding signal that could be taken from this is creeping pessimism, with funds and investors directing cash towards safe-haven Treasuries out of fear of what may be on the horizon. Perhaps it’s the unchecked inflation that the Fed doesn’t want to address, or perhaps it’s the massive, never-before-seen levels of spending that has and is taking place.
Whatever it is, it’s made its mark in one of the world’s most important asset classes and it’s likely a similar theme that’s been pushing Gold prices higher in July after an absolutely brutal month of June.
Gold Weekly Price Chart
Chart prepared by James Stanley; Gold on Tradingview
Gold Technical Forecast for Next Week: Neutral
While there’s the potential for a bullish breakout here, and that remains into next week, the June sell-off still looms large. And, the question must be asked, what more could the Fed possibly do here? It’s not as if we’re looking at the prospect of more stimulus or lower rates at this point, and there hasn’t been enough pressure to create the demand for such.
If a breakout does go down, that June sell-off won’t look as imposing with prices trading above the 50% marker of that move. But that hasn’t happened yet and all that’s there is potential. The area where higher Gold prices become more interesting is in the event that the pessimism that may be showing in the bond market filters into other asset classes, such as stocks and metals, at which point a longer-term bullish backdrop may come back into the picture. But at this point, and without that breakout having taken place yet, assuming as such seems presumptuous, and as such the forecast will be kept at neutral this week to coalesce the short-term bullish breakout potential with the bearish trend.
--- Written by James Stanley, Senior Strategist for DailyFX.com
Contact and follow James on Twitter: @JStanleyFX
DailyFX provides forex news and technical analysis on the trends that influence the global currency markets.