What a difference a week of the price of gold changes. On Friday, I commented on gold’s incredible durability in its ability to maintain its key $1,800 per ounce mark, in spite of the swarm of rising US Treasury yields and the dollar.
As I type this the gold front-month contract, which is traded on the New York’s COMEX is trying to find towards returning to the $1,800 level after a dramatic drop from it over the last two sessions.
Gold Daily
Charts are courtesy of skcharting.com
The two-day drop that occurred between Wednesday and Thursday — after it was revealed that Federal Reserve unveiled an era of hawkishness that’s new for US the monetary policy that could be bearish on gold–wiped out nearly 60 percent, or 3% in that of the COMEX front-month.
It took two weeks of hard work by gold longs who created one of the biggest offers in the short-term to push gold closer to the $1,900 mark that could be a bridge towards the longer-term $2,000 as well as records-setting goals.
The return to $1,800 was within the trading range on Friday, with the COMEX front-month hitting the session’s record high of $1,798.30–the biggest issue for gold will be getting beyond the $1,830-$1,835 level.
Just on Monday, it was able to break the impasse, reaching an all-time high of $1,854 for two months amid fears of an escalating US rising inflation increased the yellow metal’s status as an instrument to protect against the pressures on prices.
The $1,830-$1,835 price resistance is likely to turn into an even greater problem for gold, following the blow inflicted by Fed.
Gold Monthly
“Gold has been stuck for months between a rock and hard place made up by the $1,785 support and $1,835 resistance,” said Phillip Streible, precious metals strategist at Blueline Futures in Chicago. Adding:
“When it hit $1,850 last week, gold bulls were happy that they had achieved a new level. The Fed has proved this isn’t the case. We’re back to the drawing board for bulls in gold.”
In contrast, Streible said he bought the dip in gold on Thursday “on the belief that we’ll get back to $1,800.”
Fed Chairman Jerome Powell, at the end of the bank’s policy-making meeting of January on Wednesday, didn’t discount any possibility US interest rates may rise every month during the year, after the first pandemic increase is set to begin, perhaps in March.
Gold has been used for a long time as an inflation hedge, but rate increases are usually negative for yellow metal.
The Fed cut rates of interest to almost zero after the outbreak of COVID-19 in March 2020. They maintained them for more than 20 months. Powell along with other central bankers say that a series of rate increases are required now to ease price pressures that are rising due to billions in aid to the pandemic along with supply chain issues brought on by the current crisis.
Before the run of January gold was having trouble living to its role to be an inflation hedge when its Dollar Index and US Treasury yields were soaring on the back of expectations of rate rises. The situation changed after the yellow metal broke above the $1,835 mark a little about a week in the past and then stayed there for a while.
“The breakout above $1,850 was actually a fake-out scripted by the bears in the backdrop of Fed’s hawkish tone that turned tables on the bulls, pushing gold down to $1,791,” Sunil Kumar Dixit who is the chief technical analyst on skcharting.com who is a long-term observer charting gold.
Gold Weekly
Dixit stated that gold’s weekly stochastic read of 60/69 created an unfavorable crossover beneath the 70 line. It was backed by a downward-pointing Relative Strength Index that showed dominance of bulls on the market.
He also added:
“It looks like the rout is far from over as the weekly close below $1,797–which is a 50% Fibonacci retracement, measured from the $1,678 low of March 2021 to the $1,916 peak that followed–may extend the bearish bias which will target $1,785, $1,770 and $1,753 initially.”
On the other hand gold’s stochastic reading for the day of 11/32 was in oversold levels, according to Dixit.
“This may start a short term reversal by mid of next week, causing a bounce back in gold prices to retest the $1,818-$1,825-$1,835 levels.”
Despite the odds that are stacked against gold investors remain optimistic that the metal will be able to find the strength required to hit record heights in the coming year, in the event that the US inflation trend continues to be strong throughout 2022.
In 2020, gold rose to record highs of $2,100 due to inflation worries as the US began to create its biggest deficit budget since the introduction of COVID-19.
However, others suggested that the difficulties faced by gold in the present time of US financial policy should not be overstated.
“Gold is vulnerable to further technical selling now that the $1,800 level has been breached, with $1,760 providing key support,” said Ed Moya, analyst at the online trading platform OANDA.
“Risk aversion will eventually lead to some flows back into bullion, but that won’t happen until this selloff is over.”
Disclaimer: The author Barani Krishnan utilizes different perspectives that are not his own to bring a diversity into his analyses of market. To maintain his neutrality, he often exposes opposing viewpoints and market factors. He does not have an investment in the securities or commodities that he writes about.
