Gold Outlook: Volatility ahead for gold’s price

Gold’s price remained relatively stable since last report. Today we are to discuss the fundamental challenges laid ahead for the precious metal as well as upcoming financial releases that may affect the direction of its price action. Finally, we will be concluding this report with a technical analysis of gold’s daily chart. Also please note that the 4  of July (Thursday) is a public holiday in the US, with lots of traders being away, thus thin trading conditions with abrupt movements may apply.   

Negative correlation of USD and gold disrupted

It should be noted that gold’s price remained in a sideways motion despite the USD actually gaining some ground and stabilising in the past week. Observing the movement of the two trading instruments leads to the conclusion that the negative correlation existing between the two was disrupted.

Yet should volatility start to rise we expect the negative correlation of the USD and gold to come into effect once again, in which case should the USD gain further ground wee may see gold’s price retreating. 

The Fed’s intentions

We note that Fed policymakers seem to hesitate to start cutting rates, despite recognising the need to cut rates before year’s end. Overall their hesitation seems to contradict market expectations for the bank to proceed with two rate cuts, one in September and one in December.

Should we see more Fed policymakers coming forward and supporting the idea of maintaining rates high for longer, we may see the market being forced to reposition itself and thus could provide some downward pressure for gold’s price. Hence we tend to highlight the release of the Fed’s June meeting minutes on Wednesday.

The document is expected to be scrutinised by market participants and analysts alike, in search of clues regarding the bank’s intentions. Should the document show that Fed policymakers are still hesitant to start cutting rates or are even predisposed to keep rates high for longer we may see gold’s price losing ground.

US financial releases

Over the coming week, we note that a number of US financial releases could affect gold’s price as well. We make a start with the release of June’s US employment report on Friday’s early American session.

The Non-Farm Payrolls figure is expected to drop to 190k if compared to May’s 272k, the unemployment rate to remains unchanged at 4.0% and the average earnings growth rate to slow down to 3.9%yy if compared to May’s 4.1%yy.

Should the actual rates and figures meet their respective forecasts, the indicators would be aligning towards implying a possible easing of the US employment market which in turn may add more pressure on the Fed to start cutting rates given its dual mandate to keep inflation low and steady yet also at the same time promote maximum employment.

In such a case we may see gold’s price getting some support, yet we have to note that the actual rates and figures of the release tend to differ substantially from forecasts hence uncertainty is at high levels. On second note we would also like to mention the release of the ISM non-manufacturing PMI figure for June on Wednesday.

US Yields on the rise

We also note that since our last report, the yields of US bonds tended to be on the rise, with longer bonds having a more abrupt upward movement. Overall the rise of US yields tends to enhance the attractiveness of US Bonds as an alternative safe haven investment, given that gold bears no interest, on the contrary it has storage costs.

Should US yields continue to rise in the coming week, we may see investments being diverted from gold towards US Bonds thus providing some bearish tendencies for gold’s price. 

Gold Technical Analysis

XAUUSD Daily Chart

• Support: 2290 (S1), 2220 (S2), 2145 (S3)
• Resistance: 2375 (R1), 2450 (R2), 2500 (R3)

Gold’s price maintained a sideways motion over the past week, confining its price action between the 2290 (S1) support line and the 2375 (R1) resistance line.

We tend to maintain a bias for the sideways motion to continue, given also that the RSI indicator continues to run along the reading of 50, implying a rather indecisive market. Furthermore, we note that the Bollinger bands have narrowed, which tends to reflect the lower volatility characterising the precious metal’s price action and if maintained could allow the sideways motion to be maintained.

Also we note the flattening out of the 20 moving average, which is also the median of the Bollinger Bands reflecting the sideways motion of the precious metal’s price over the past two weeks. Should the bulls take charge of the direction of gold’s price we may see it breaking the 2375 (R1) resistance line and aim for the 2450 (R2) resistance level, which is also a record high for gold’s price.

On the flip side for a bearish outlook we would require gold’s price to break the lower boundary of its current sideways motion namely the 2290 (S1) support line and start aiming for the 2220 (S2) support level, which used to be a resistance level, yet has turned to support as the price action of gold has moved higher.

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