Gold price hit a fresh record high on Tuesday, building on the rally that has seen the metal’s prices surge by over 6% since the start of September. As at the time of writing, the precious metal has pulled back to trade at $2,652.75 per ounce after reaching a new all-time high at $2,655. Year to date, it has rallied by 28% as its safe haven appeal shines bright.
US consumer confidence
Gold price has continued to benefit from the cheers of Fed’s interest rate cut about a week ago. Investors expect the metal to remain in a bull market with its upward potential largely dependent on the Fed’s tone.
An environment of lower interest rates tends to be bullish for gold price as it lowers the opportunity cost of holding the non-yielding asset. The resultant attractiveness of gold to investors has seen the precious metal enter the overbought territory with an RSI of 75 as at the time of writing.
Investors are now eyeing the upcoming US economic data for cues on whether the recent super-sized rate cut is the first of several aggressive reductions. Indeed, expectations of another 50 basis points rate cut during the Fed’s November meeting are high.
On Tuesday, consumer confidence data released by the Conference Board indicated that the consumer’s perspective on the US economy was the lowest it has been in over three years. The index dropped from 105.6 in August to 98.7 in September amid pessimism over the labor market and business conditions in the country.
In reaction to these figures, Treasury yields moved lower while lowering the opportunity cost of holding the non-yielding yellow metal. Similarly, the dollar index erased most of the gains recorded in the past two sessions. Gold price tends to move inversely to the value of the US dollar as a decline in the currency makes the asset cheaper for buyers with foreign currencies.
In the ensuing sessions, investors will be keen on Jerome Powell’s remarks on Thursday. Besides, the PCE price index, which is the Fed’s preferred gauge of inflation, is set for release on Friday. In the last Fed meeting, Chair Powell asserted that the upside risks to inflation have “diminished”. Subsequently, the focus is on supporting the labor market and ensuring a soft landing.
In the short term, the overbought conditions and profit-taking mood may subject gold price to a correction ahead of Friday’s data release. Even so, its downside appears limited amid bets that the Fed will remain dovish.
China’s stimulus
Gold price has further been boosted by the large stimulus package announced by the People’s Bank of China (PBoC) on Tuesday. China is gold’s largest market, which explains why the central bank’s announcement boosted prices to a new record high.
In a rare press conference, the central bank’s Governor Pan Gongsheng highlighted plans to lower borrowing costs while allowing banks to increase on their lending. More specifically, Governor Gongsheng indicated that the reserve requirement ratios (RRR) -the amount that banks should hold in reserve – will be reduced by half a percentage point.
This move is set to free up 1 trillion yuan ($142 billion) with another cut likely before the end of the year. Additional measures aimed at boosting the world’s second-largest economy include lowering interest rates on current mortgages and reducing the minimum down payments to 15%.
These measures follow a streak of disappointing data from the Asian country. Indeed, analysts expect China to miss its growth target of 5% this year as its real estate sector continues to struggle.
Gold price analysis
In my last article on gold, I warned that the metal would form a bearish reversal, pointing to the rising wedge pattern that has been forming. In most periods, the wedge pattern is one of the most bearish sign.
Now, however, the wedge has been invalidated since gold has moved above the upper side of this pattern.
Gold has remained above the 50-day and 100-day Exponential Moving Averages (EMA), meaning that bulls are in control. The Average Directional Index (ADX) has moved to 22 and is pointing upwards.
Also, the Relative Strength Index (RSI) has continued rising and has just crossed the overbought point of 76. Moving above the overbought point is a sign that it has momentum. Additionally, the Murrey Math Lines tool has moved to the ultimate resistance point at $2,656.
Therefore, the path of the least resistance for gold is bullish, with the next point to watch being at $2,700. A break above that level will see it jump to the extreme overshoot point at $2,734, which is about 3.7% above the current level.
The alternative scenario is where gold retreats and retests the upper side of the wedge chart pattern.
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