Gold Talking Points
The price of gold struggles to hold its ground following the Federal Reserve and European Central Bank (ECB) interest rate decisions as both central banks stick to a zero interest rate policy (ZIRP), but the ongoing response to COVID-19 may continue to act as a backstop for bullion as monetary authorities rely on their balance sheets to combat the slowdown in economic activity.
Fundamental Forecast for Gold: Bearish
The recent pullback in gold may gather pace in May as the Reserve Bank of Australia (RBA) and Bank of England (BoE) are expected to keep interest rates at a record low, and the wait-and-see approach for monetary policy may dampen the appeal of bullion as governments across the advance economies unveil plans to roll back lockdown laws.
The unprecedented response by monetary as well as fiscal authorities may help to jumpstart the global economy as major central banks retain a dovish forward guidance for monetary policy, and hopes for a V-shaped recovery may continue to restore investor confidence as the Great Lockdown appears to have passed its peak.
In turn, the slew of unconventional measures to combat the economic shock from COVID-19 may tame the flight the safety, but the update to the US Non-Farm Payrolls (NFP) report may stoke fears of a protracted recovery as employment is expected to contract 22.0 million in April, which would mark the biggest decline since the data series began in 1939.
With that said, the low interest rate environment along with theballooning central bank balance sheets may continue to act as a backstop for bullion as marketparticipants look for an alternative to fiat-currencies, but recent price action warns of a near-term correction in gold amid the string of failed attempt to test the November 2012 high ($1754).
Gold Price Daily Chart
Source: Trading View
The opening range for 2020 instilled a constructive outlook for the price of gold as the precious metal cleared the 2019 high ($1557), with the Relative Strength Index (RSI) pushing into overbought territory during the same period.
A similar scenario materialized in February, with the price of gold marking the monthly low ($1548) during the first full week, while the RSI broke out of the bearish formation from earlier this year to push back into overbought territory.
However, the monthly opening range for March as less relevant amid the pickup in volatility, with the decline from the monthly high ($1704) leading to a break of the January low ($1517).
Nevertheless, the reaction to the former-resistance zone around $1450 (38.2% retracement) to $1452 (100% expansion) instilled a constructive outlook for bullion especially as the RSI reversed course ahead of oversold territory and broke out of the bearish formation carried over from the previous month.
The break/close above $1710 (100% expansion) pushed the price of gold to a fresh yearly high ($1748), but the precious metal continues to track the range from April amid the lack of momentum to test the November 2012 high ($1754).
The Relative Strength Index (RSI) highlights a similar dynamic as a bearish formation takes shape following the failed attempts to push into overbought territory.
In turn, gold may continue to consolidate in May amid the string of failed attempt to close above the Fibonacci overlap around $1733 (78.6% retracement) to $1739 (100% expansion), with the lack of momentum to hold above the $1676 (78.6% expansion) region bringing the $1655 (78.6% expansion) area on the radar.
Next area of interest comes in around$1627 (61.8% expansion) to $1635 (78.6% retracement) followed by the $1610 (61.8% expansion) region.
— Written by David Song, Currency Strategist
Follow me on Twitter at @DavidJSong