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Gold Shows Signs of Life, But Heads Towards Another Losing Month

28 September 2022

The precious metal is largely considered as a hedge to inflation, but it has not confirmed this status during the current year. It did kick it off with a rally, but as the Fed begun hiking rates back in March, things changed dramatically. The central bank started conservatively, but became much bolder over the summer, delivering this month the third consecutive 0.75% rate increase, in the most aggressive cycle since at least the mid-1990s. More to it, officials have pointed to more tightening ahead, in order to bring down inflation and avoid the de-anchoring of expectations.

This policy has been a massive source of strength for the US Dollar, which has not allowed gold to act as an inflation hedge and has sent it to a free fall. XAU/USD is drawing to the end of its sixth straight losing month, having already closed two weeks below the critical 1,682-77 region we had highlighted in our previous analysis.

This marks the 38.2% Fibonacci of the 2015 Low/2020 High rally and the neckline of the Double-Top formation - with the 2020 record high and the 2022 high acting as the relevant tops. This exposes it to the next Fibonacci level at 1,561 and could open the door to even bigger losses, potentially towards the Monthly EMA200 (at around 1,290). Looking at the H4 chart, XAU/USD puts up a fight today, reacting from Monday's slump to the lowest level since April 2020 and the height of the pandemic. Furthermore, the Relative Strength Index diverged higher and this could potentially be a sign of further near-term recovery.

However, the upside looks unfriendly and we struggle to see at this stage how the precious metal can challenge the EMA200 in the 1,700-5 area. Despite today's signs of life, XAU/USD is in risk of fresh lows below 1,608, although a steeper decline towards and beyond 1,570, will likely require fresh impetus.

This week's economic calendar includes key economic data points for the US, such as the GDP and PCE Inflation updates, as well as a slew of Fed speakers, including chair Powell.


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