Gold Price Recovers to Push RSI Indicator Out of Downward Trend

Gold Price Talking Points

The price of gold trades to fresh monthly highs as growing speculation for another round of US fiscal stimulus drags on the Greenback, and 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 Recovers to Push RSI Indicator Out of Downward Trend

The price of goldextends the advance from the monthly low ($1873) despite the deadlock in Congress as US President Donald Trump tweets “Covid Relief Negotiations are moving along,” and current market trends may keep bullion afloat as the Federal Reserve appears to be in no rush to alter the path for monetary policy.

In turn, 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 price of gold no longer traders to fresh yearly highs during every single month in 2020, and it seems as though the Federal Open Market Committee (FOMC) will rely on its current tools to support the US economy as the central bank vows to “increase its holdings of Treasury securities and agency MBS (mortgage-backed securities) at least at the current pace.”

The FOMC appears to be in no rush to alter the path for monetary policy as the Summary of Economic Projections (SEP)show the longer run interest rate forecast unchanged from the June meeting, and the central bank may ultimately stick to the same script at the next interest rate decision on November 5 as

However, the FOMC may change its tone over the coming months as Fed officials pledge to provide a “more explicit outcome-based forward guidance,” and the threat of a protracted recovery may push the central bank to tweak its non-standard measures as Cleveland Fed President Loretta Mester, a 2020 voting-member on the FOMC, insists that the committee could “shift to longer-term Treasuries, as we did during the Great Recession.

The comments suggest the FOMC is in no rush to deploy more unconventional tools as most Fed officials judged that “yield caps and targets would likely provide only modest benefits in the current environment, but the low interest environment along with the ballooning central bank balance sheets may continue to heighten the appeal of gold as an alternative to fiat-currencies as key market themes remain in place.

In fact, the net-long US Dollar bias from earlier this year has resurfaced, with the IG Client Sentiment report showing retail traders net-long USD/CHF, USD/CAD and USD/JPY, while the crowd is net-short GBP/USD, AUD/USD, NZD/USD and EUR/USD.

The tilt in retail sentiment suggests key market themes resulting from the COVID-19 pandemic are likely to persist as major central banks become increasingly reliant on their non-standard tools, and the price of gold may continue to reflect an inverse relationship with the US Dollar as 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.”

With that said, the price of gold may continue to retrace the decline from the record high ($2075) as it extends the series of higher highs and lows from the monthly low ($1873), while 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 ($1938) 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 close above the Fibonacci overlap around $1907 (100% expansion) to $1920 (161.8% expansion) brings the $1956 (23.6% expansion) region on the radar, with the next area of interest coming in around $1971 (100% expansion) to $1985 (261.8% expansion).
  • 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

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