Gold Price Consolidation Brings Monthly Low on the Radar

Gold Price Talking Points

The price of gold pulls back from a fresh monthly high ($1933) as the lack of urgency to pass another US fiscal stimulus package drags on investor confidence and props up the Greenback, but the precious metal may continue to retrace the decline from the record high ($2075) as the Relative Strength Index (RSI) breaks out of the downward trend carried over from August.

Gold Price Consolidation Brings Monthly Low on the Radar

The price of goldstruggles to retain the advance from the previous week as the US Dollar Index (DXY) appears to be reacting to a confluent zone of support, and bullion may continue to give back the rebound from the monthly low ($1873) as it carves a series of lower highs and lows.

However, failure to test the monthly low ($1873) may set the stage for a larger recovery as the price for gold clears the opening range for October, and the decline from the record high ($2075) may turn out to be an exhaustion in the bullish trend rather than a change in market behavior even though the precious metal no longer traders to fresh yearly highs during every single month in 2020.

Key market themes may keep gold prices afloat as the Federal Reserve’s balance sheet approaches the peak from June, and the dovish forward guidance for monetary policy may continue to heighten the appeal of gold as an alternative to fiat currencies as the central bank vows to “increase its holdings of Treasury securities and agency MBS (mortgage-backed securities) at least at the current pace.”

In turn, gold may continue to reflect an inverse relationship with the US Dollar as the Federal Open Market Committee (FOMC) relies on its non-standard tools to support the US economy, but the crowding behavior in the Greenback has resurfaced even though Chairman Jerome Powell and Co. remain “committed to using the Federal Reserve’s full range of tools in order to support the U.S. economy.”

The IG Client Sentiment report reflects the net-long US Dollar bias from earlier this year as retail traders are net-long USD/CHF, USD/CAD and USD/JPY, while the crowd is net-short GBP/USD, EUR/USD, AUD/USD and NZD/USD.

The tilt in retail sentiment suggests key market themes resulting from the COVID-19 pandemic are likely to persist as major central banks largely rule out a V-shape recovery, and the low interest rate environment may keep gold prices afloat as the FOMC plans to provide a “more explicit outcome-based forward guidance.”

With that said, the decline from the record high ($2075) may turn out to be an exhaustion in the bullish trend rather than a change in market behavior as the crowding behavior in the US Dollar resurfaces, and the price of gold may extends the advance from the monthly low ($1873) as the Relative Strength Index (RSI) breaks out of the downward trend carried over from August.

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Gold Price Daily Chart

Image of gold price daily chart

Source: Trading View

  • The price of gold pushed to fresh yearly highs throughout the first half 2020, with the bullish price action also taking shape in August as the precious metal tagged a new record high ($2075).
  • However, the bullish behavior failed to materialize in September as the price of gold traded below the 50-Day SMA ($1933) for the first time since June, with developments in the Relative Strength Index (RSI) negating the wedge/triangle formation established in August as the oscillator slipped to its lowest level since March.
  • Nevertheless, the decline from the record high ($2075) may turn out to be an exhaustion in the bullish trend rather than a change in market behavior as the RSI reverses ahead of oversold territory and breaks out of the downward trend carried over from August.
  • The recent series of lower highs and lows brings the monthly low ($1873) on the radar as the price of gold struggles to hold above the Fibonacci overlap around $1907 (100% expansion) to $1920 (161.8% expansion), but lack of momentum to test the monthly low ($1873) may set the stage for a larger recovery as the price for gold clears the opening range for October.
  • Need a move back above the Fibonacci overlap around $1907 (100% expansion) to $1920 (161.8% expansion) to bring the $1956 (23.6% expansion) region back on the radar, with the next area of interest coming in around $1971 (100% expansion) to $1985 (261.8% expansion).
  • Meanwhile, the RSI may continue to show the bearish momentum abating if it makes its way towards overbought territory, with a move above 70 likely to be accompanied by higher gold prices like the behavior seen in July.

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— Written by David Song, Currency Strategist

Follow me on Twitter at @DavidJSong

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