The bulls are riding out a storm of near term volatility from the speech by Fed chair Powell and look to be coming out on top again. Can they drive a decisive breakout above $1955 to open the upside once more? Technical support is growing and the ever looser monetary policy from the Fed gives gold added fundamental support too. We favour this consolidation to be bought into and for an upside breakout to test recent resistance levels once more.
Fed chair Jerome Powell has laid out a path that the FOMC will now have lower rates for longer. This has key implications for the dollar and also gold moving forward.
Tweaking the Federal Reserve’s mandated target for inflation from 2% to “inflation that averages two percent over time” is a subtle shift but groundbreaking too. It means that rate hikes will not be forced as inflation rises above 2%.
Instead this simply would balance out the average for periods where inflation has been below 2%. No rate increases, means that inflation expectations can rise without interest rates following suit. It means a “bear steepening” of the yield curve in the near term. This is risk positive, dollar negative, but also because rates at the front end of the curve are not rising, it means that real yields would also remain anchored. This is positive for gold in the medium to longer term.
It is interesting to see that whilst the 10 year Treasury yield has risen today, gold is also rising. It may now mean a reduction in the strength of the negative correlation between the 10 year and gold now. This will need to be watched.
Looking at the dollar though, there is a weakening developing once more, whilst gold is rising. The dollar could become more of a driving force for gold now.
This speech and the stance taken by Powell and the Fed now serves to underscore the longer term positive fundamentals for gold. Inflation has only briefly been above 2% twice in the past decade and a bit since the 2008 financial crisis. Inflation is subsequently incredibly tough to generate, least of all given the financial crisis from the pandemic where there is such a large demand gap.
This will underpin for a stronger gold price in the medium to long term. Loose global monetary policy for many months (and possibly years) to come, will keep real yields subdued/negative and should continue to mean gold is attractive. Subsequently, this is still a good environment to be buying gold into supported weakness.
- $1923 – 28h August low
- $1910 – 27th August low
- $1902 – 26th August low
- $1955 – old pivot still acting as resistance
- $1976 – 27th August spike high
- $1980 – old breakdown form 19th August, now resistance
As with most of the major markets we cover, gold saw elevated volatility yesterday on Fed chair Powell’s speech. An initial upside break of a 3 week downtrend, then failed and the market retreated to find support at the bigger now 12 week uptrend. Technically, it is interesting to see that once more the 23.6% Fibonacci retracement (of $1451/$2072) at $1926 is again a basis of support into the close. With the market ticking higher today, there is a sense of support forming. This is added to buy a stabilising of momentum indicators, where the Stochastics are beginning to tick higher and RSI holding around 50. A closing breach of the 3 week downtrend (at $1949 today) would suggest the bulls regaining traction.
The hourly chart shows that a decisive (holding) move above $1955 would be a key improvement near term, however, there is a sense that with hourly RSI oscillating consistently between 30/70 this is still a range of just over a week. The importance of support between $1900/$1915 seems to be growing, with several intraday lows in that band in the past seven sessions. Now through Fed chair Powell’s speech, and bull trends/support holding, we are looking for the next buy signal. A decisive close above above $1955 opens $2015, with $1980 initial resistance.
STRATEGY: With the dovish implications of Fed chair Powell’s speech now into the market the gold price is finding strength today. Consolidation is now looking to breakout once more. A decisive (and confirmed) move above $1955 would be a bullish break and re-open the upside once more. We now move towards renewed bullish outlook on gold for tests of recent rally highs. Conviction would fade on a closing breach of $1926. Below $1900 turned corrective again.