Gold, XAU/USD, Inflation Expectations, US Dollar, Federal Reserve – Talking Points:
- Accommodative monetary policy and record low interest rates have created the perfect environment for gold to outperform.
- However, US-China tensions may cap upside potential for the time-being.
- RSI divergence suggests a near-term pullback is on the cards.
Record low interest rates and the unprecedented monetary policy response from the Federal Reserve have seemingly created the perfect environment for gold prices to extend their recent run higher.
The central bank’s $3 trillion balance sheet expansion, to help shelter the US economy from the coronavirus pandemic, has substantially devalued the US Dollar and fueled long-term inflation fears.
Stoking the appeal of gold as a hedge against inflation and reflected in the highly positive correlation seen between 5-year forward inflation expectations and bullion prices.
Inflation Expectations vs Price of Gold (2019-Present)
Source – FRED
Furthermore, the performance of anti-fiat bullion in times of elevated volatility reflects the ‘safe haven’ aspects of the non-yielding asset. Tending to remain relatively uninfluenced by the oscillations seen in the markets primary fear-gauge, the VIX.
Therefore, it’s understandable that haven inflows may also be driving the price of gold, given the unpredictability of the current global economic outlook.
However, gold’s susceptibility to the performance of the US Dollar may cap potential upside for the time-being as escalating tensions between the United States and China begin to weigh on market sentiment.
As tit-for-tat exchanges burgeon investor’s appetite for the Greenback, a period of US Dollar strength looks in the offing should the Trump Administration expectedly ramp up anti-China rhetoric ahead of US elections in November.
On the other hand, a distinct de-escalation between the world’s two largest economies could see the ‘goldilocks’ environment for gold continue and potentially see the precious metal extend its historic climb above the $2,000/oz mark.
Gold Correlation Matrix (2018 – Present)
Data Source – Bloomberg
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Gold Price Daily Chart – Near-Term Pullback in the Offing
From a technical perspective, resistance at the 61.8% Fibonacci extension (2,077.88) may continue to cap upside potential as RSI divergence suggests a near-term pullback is on the cards.
Moreover, the development of the MACD indicator hints at underlying exhaustion and could encourage sellers should it cross back below its ‘slower’ signal line counterpart, after pushing to its most extreme daily readings since August 2011.
With that in mind, prices may slide back to psychological support at the $2,000/oz mark before gearing up to test the yearly high (2075.15).
A daily close above the 61.8% Fibonacci is needed to validate bullish potential and open a path to test the $2,100/oz mark.
Conversely, a break below the August 5 low (2009.69) and the Schiff Pitchfork median line could lead to a more sustained pullback in the price of bullion. Key regions of support falling at the July high (1984.22) and August low (1960.60).
Gold daily chart created using TradingView
— Written by Daniel Moss, Analyst for DailyFX
Follow me on Twitter @DanielGMoss
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