Gold broke out of the 6 years long term accumulation zone from 2013 to 2019. Once it broke above the $1350 resistance zone, it was like a rocket head for the mars as it forged forward to break the previous high made in 2011.
This bullish sentiment is buoyed further by the uncertainty the world is facing now due to widespread Covid-19 pandemic. Hence despite the stock markets making an equally strong run lately, Gold was joining in to outdo the returns of the stock market. Evidently, it won.
The last major accumulation zone we saw was around the $1740 zone, and volumes after that zone has been thin ever since. So right now Gold has been range-bounded between $1920 and $2070 zone.
The Gold & Dollar Relationship
A recovery in the U.S. Dollar against a basket of major currencies is helping to put pressure on gold prices shortly before the regular session opening on Friday. Treasury yields are inching lower and since Wednesday’s Fed minutes release, the traditional yield, dollar, gold relationship is not working. This is probably a short-term thing, but you should pay attention to it.
The type of price action we’re seeing usually occurs when investors treat both Treasurys and the U.S. Dollar as safe-haven investments. The Fed spooked traders during the Fed Minutes release with a dire forecast for the economy. The problem with the economy may have been confirmed with the release of a weak U.S. Weekly Initial Claims report last Thursday.
All eyes will be on FOMC Chairman Jerome Powell next week as he is scheduled to deliver his remarks on the monetary policy framework review and this will be the next significant catalyst for gold prices.
Previewing this event, gold has a tendency to resume its uptrend and revisit the record high if Powel signals greater tolerance for “higher than projected” inflation. This should fuel a deeper drop in bond yields and thus, fresh sell-off in the greenback.
On the other hand, if Powel doesn’t provide clear guidance, the dollar oversold bounce might gain greater momentum. This would result in gold prices finding greater downwards pressure towards the $1900 price zone.
Currently Gold is showing a mixed signal across my favourite oscillators. Unlike the EURUSD analysis I posted last week, there is no clear signal that Gold is going to just “turn around” for the bears just yet.
Here is what might happen technically…
- Gold goes range bound for awhile between $1920 & $2070 zone. In this case, my preference is still leaning towards the long side for Gold.
- Gold rallies on the backdrop of greenback tumbling and the next key resistance zone to watch for is the zone between $2020 to $2070.
- Gold breaks below $1920 zone. Under such a scenario, I would lean towards short term bearishness and ride downwards toward target of $1810 zone.
Similar to EURUSD, or in fact any pairs, I am never a fan of shorting a strong bullish market. It’s like stopping billions worth of hemorrhaging with just mere thousands of dollars. This is the case we are witnessing on Gold right now.
The fact that the bullish structure is holding, and Gold is still holding despite breaking into a lower high structure, seems to suggest that prices for Gold are heading for a sideways range for a while. I would want to watch for the key level to be breached first before I would consider a short swing on Gold right now.
If you have questions regarding this pair, reach out to me at [email protected] .