Gold Threatens Larger Break After Test of 2-Year Lows

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Golden Talking Points:

  • Gold prices broke to a fresh two-year low last week, testing below $1662 before catching a late-week bounce.
  • Gold is now working on its sixth consecutive monthly loss, which correlates with the Fed’s rate hike theme for this year. Gold bears grew louder and louder as the Fed increased.
  • Sellers are back again this week and with the Fed expected to continue its hawkish path, the fundamental backdrop could continue to drive bearish trends in Gold.
  • The analysis contained in an article depends on price action and chart formations. To learn more about price action or chart patterns, check out our DailyFX Education section

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Gold prices started last week sitting on a strong shelf of support but by the end of the week, gold had already set a fresh two-year low.

The CPI report on Tuesday was undoubtedly an important factor. Last Monday even saw gold prices strengthen to resistance at previous support. But as CPI printed above expectations and as markets began to internalize the possibility of continued hawkishness from the Fed, with perhaps as much as a 100 bp increase at this week’s decision, support continued to slip and gold prices pushed below the 1671 level that had. previously helped lower the back in March of 2021.

Gold Weekly Price Chart

gold weekly price chart

Chart prepared by James Stanley; Gold at Tradingview

Now, whether we get the 100bp hike this week remains to be seen and by most estimates, that is a remote possibility at this point. But, still, the fact remains that the Fed’s priority is fighting inflation and it looks like they will continue to hike and tighten until inflation is back under control – and for gold this is a bearish factor.

With negative real yields gold can be an attractive investment. Because, after all, negative real yields bring currency depreciation, right? The currency can buy less on a relative basis due to inflation and for gold, this can be positive because gold prices are based on that same fiat currency, which is lowered by negative real yields. When rates rise, however, there is now an opportunity cost to holding gold – and that’s the rate.

If investors can get 3% in a money market or 90-day T-bill, what’s the point in holding capital in a non-interest-bearing asset like gold? And even if you don’t think of it as a golden bull – others are – that can affect price action which, without exception, will affect your attitude. So as rates rise higher and higher, so does that opportunity cost for holding a non-interest bearing bearish asset. So, the case for staying long must remain so very compelling or else, sellers will run…

This is why gold prices saw a sudden decline in the early 80s: As rates rose, capital flowed into investment properties and away from gold. And when the prices of gold fell, that bull case to keep capital in an inflation hedge, well that was turned on its head and now investors were faced with the prospect of major losses – in addition to the lost opportunity cost of being invested in treasuries or. money markets at somewhat attractive interest rates.

From the monthly chart below, we can see where gold prices have been tied for the better part of the past two years, since the top in August 2020. That top has now been tested twice, causing double top formation. That formation had a neckline at the low between the two tops – which was that same 1671 level that was traded through last week.

The big question now is whether sellers have a follow through this week FOMC rate decision. Note that gold prices are now working on their sixth consecutive monthly loss – which correlates with the Fed’s rate hikes that began in March and have picked up steam along the way.

Gold Monthly Price Chart

gold monthly price chart

Chart prepared by James Stanley; Gold at Tradingview

When the Dam Breaks

I’ve been talking about this for a while, but over the two-year range, gold prices have tested a really big zone of support many times and there’s a lot going on there. I traced the zone from the 1700’s psychological level down to the previous swing low of 1671. In between, there is also a Fibonacci level worth noting at 1690 along with some other previous swing lows. So, it’s a big zone that was already tested in July before a really strong reversal. That reversal was reversed before President Powell’s speech at Jackson Hole and as the Fed became more and more clear with its plans, sellers began to take a more noticeable tone in gold.

Bears advanced the bearish theme in a big way last week by setting that fresh two-year low. But follow-up was lacking and this provides a complication for follow-up approaches. And, perhaps more to the point, gold has traded very sharply this year, such as the early September test at 1700 that led to a near $50 rally in less than two weeks.

So, for bears, the way forward would seem to be either a) waiting for a pullback to resistance that could reopen the door for shorts or b) looking to set up breakout logic on prints of recent lows. For the former, there are a series of nearby levels that could be useful for such. S as of this writing, is a sign of residual support at the 1671 level, which would also be higher-lower if it holds. This keeps the door open for a push to 1690 or perhaps even 1700, both areas of support-turned-resistance.

If buyers are able to push out of the 1700 zone, then a larger recovery occurs and resistance potential will then appear at either 1717, 1731 or 1740, all swings from previous support that have shown some element of resistance so far.

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Gold Four Hour Price Chart

gold four hour price chart

Chart prepared by James Stanley; Gold at Tradingview

— Written by James Stanley, Chief Strategist, DailyFX.com & Head of DailyFX Education

Contact and follow James on Twitter: @JStanleyFX



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