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Gold Outlook: held at balance or near tipping point?


7 July 2022

Not much has changed in the past month as the precious metal is stuck in limbo, confined by equally strong support and resistance forces. Gold has been caught in a balancing act influenced by various complexly intricate and interconnected relationships, playing a game of tug of war. In this report we are going to shed light on those relationships, taking them apart and closely examining the components, for a fresh perspective to appear. Tying those relationships to current and future economic developments will provide us with an understanding on where gold stands, and whether the balancing act continues or whether we reached a tipping point. Let’s dive right in.

After rising to near all-time highs in the beginning of March 2022, partially due to the Russian invasion in Ukraine, gold performance has been losing steam, plunging lower over the next three months marking its biggest quarterly percentage decline in more than a year. Its price maintained a rather stable and consistent sideways action for the months of May and June, trading between the bounds of $1784 as support and $1878 as resistance. Recently however, according to our analysis, we observed a steady decline initiated at the $1878 upper bound, formulating a descending trendline and is currently edging closer to the support $1784 level.

As the overall market conditions appear to be grim at best, investors’ expectations foresee no improvement in the near horizon. “Pressures on gold seem likely to persist in the second half of the year, investors and analysts said” according to a Wall Street Journal article. As robust inflation ravishes the economic scene, spurred central banks across the world to act by aggressively hiking interest rates, some more than others, in an attempt to contain the overspilling. In broader terms, the relationship of rampant inflation urges market participants to seek refuge to gold, as historically it has shown to be a safe haven. As the US markets continue to appear beaten down, the migration to gold seems attractive, nonetheless. Market turmoil and war could also boost the price of gold and without a doubt we experienced plenty of that in the Q1. Having stated the above, the outlook for a price appreciation of gold seems imminent yet remains to be seen.

Despite the persistent inflation and market turmoil which favors it, gold is being weighed down by rising bond yields, as a consequence of aggressive hikes and the subsequent strengthening of the US dollar. More specifically, the accelerated rate increases of the Federal Reserve presents a dilemma for investors, whether to flee from the safe haven asset and choosing the higher-yield Treasuries option instead as they provide relatively steady regular payouts. On the other hand, the strengthening of the dollar sets overseas buyers in a disadvantaged position as it is more expensive to purchase gold.

Of particular importance for the future development of gold this week are the upcoming news releases on Friday the 8th of July by the US, in regard to the Non-Farm Payrolls, the Unemployment Rate and the yearly Average Earnings reports. As of today, according to preliminary results provided by the surveys, should the release of the US employment report for June actually disappoint traders and weaken the USD, we may see the precious metal actually gaining some ground, as the negative correlation of gold to the greenback could come into play. Therefore, traders will be looking closely on how to interpret the actual finalized figures of the above releases and reassess their future outlooks on gold. We tend advise caution when trading the precious metal at the time of the release as high volatility may occur. Also, before that on Wednesday the Fed is to release the minutes of its June meeting and market participants are expected to scrutinize the document for any clues regarding the Fed’s intentions. Hence once again we may see increased volatility for gold’s price.

XAUUSD H4 chart

XAUUSD H4 chart

Gold is currently trading in a downward trend since the 13th of June where it attempted to move past the 1879 resistance (R1) line but failed to do so. As shown by the downward trendline it has been reaching lower peaks and on the 1st of July it fell to the 1784 level where it found support (S1), with similar levels seen near the end of January 2022. Having said that, we hold a bearish outlook bias for Gold for the short-term horizon. Supporting our case is the RSI indicator below our 4-hour chart, which exceeded the oversold bound of 30 on the 1st of July with a reading of 26, quickly bouncing back towards the 50 level. However, on today’s session we can see it point downwards once again. Also worth pointing out is the price action flirting with the lower bound of the Bollinger bands on July 1st. Should the bears continue to reign over, then we might see a definitive break below the 1784 support (S1) line and the price action moving towards the 1769 support (S2) line and possibly beyond, a level once seen before in December of 2021. Should the bulls take over, we would require a break of the downward trend line as first sign of a trend reversal and the 1836 resistance (R1) line and a move near the 1857 resistance (R2) level.

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