The Breakout Potential in Gold
Gold is trading at a significant inflection point. Essentially, the precious metal has not been able to scale above the $1350 price point since it dropped below it around 2013 to 2014.
Adding to the horizontal level, there is further resistance to create a confluence. Specifically, there is the 100-month moving average and a declining trendline that originates from a high in 2016. Combines, this creates a huge upside hurdle.
I expect that if we manage to break above it that there will be a major shift in sentiment. Most likely, it would signal that Gold is no longer in the correction that started in 2011 and that it is in a new bullish cycle.
A Fundamental Catalyst Could be the Fed Meeting
The Federal Reserve meets on Wednesday. I think that a lot of the recent rally in gold can be attributed to the Fed, or more specifically, monetary policy expectations.
Essentially, the Fed was on a rate hike cycle and, rather abruptly, the markets are now looking for policymakers to cut rates. The futures markets are pricing in about two rate cuts this year. Some analysts believe it might even be three.
If the interest rate declines alongside the already falling bond yields, the price of Gold stands to prosper. In this context, I think this week’s Fed meeting might just be the most important of the year.
Technical Outlook for the Week
As indicated by the monthly chart above, there is quite a bit of overhead resistance in play. I don’t see how we break above it without some form of catalyst. For that reason, I expect rallies in the early week to be faded.
The weekly chart shown below gives a better view of the mentioned horizontal level and declining trendline. This resistance has clearly been tested on several attempts since late 2017.
In addition to the overhead roadblock, there was a doji print on a weekly chart and daily chart. This candlestick pattern suggests exhaustion and often signals a reversal, further adding to the case for some early week weakness.
On a daily chart, there are two levels on my radar. One falls at $1334 and the second at $1321. The former carries some confluence with the 61.8% Fibonacci level measured from last week’s low to high. The latter reflects a horizontal level that has acted as both support and resistance in the past.
I think there might be a buying opportunity in the early week but the Fed meeting is likely to accompany volatility and perhaps the safer play is to stay clear until after the Fed has concluded.
The risk is to the downside considering how aggressively the markets are pricing in rate cuts for the United States. If the Fed disappoints, there could be a bit of a liquidation. If this happens, I would not be surprised to see Gold prices dip towards $1321 or even slightly below it.