HomeContributorsFundamental AnalysisGold's Step Back Before Breaking $2000

Gold’s Step Back Before Breaking $2000

Gold stormed $2000 twice last week, but both attempts failed to consolidate above this significant round level. The double correction since the previous week clears the way to the upside but does not signal that gold is in trouble.

The momentum of gold’s rally from the lows of the 8th pushed it up by over $200 at its peak, creating a short-term overbought situation. Last week, the brief touch below $1940 was too quick and impulsive to pave the way for upward movement.

The problems in the US and Europe caused gold and silver rallies as investors tried to park their capital quickly for fear of leaving their money in the banks. Such momentum is unlikely to be the basis for growth in the medium to long term, but changes in monetary policy could.

Last week, the Fed raised interest rates with one hand while handing out liquidity to banks with the other. These are incompatible policy moves, and now the balance of power is such that the Fed would prefer to stop raising rates so that it does not have to act repeatedly as a lender of last resort.

We saw a similar shift in Fed monetary policy in the past at the end of 2018, when the two-year gold rally began. The subsequent two-year sideways rally and pullback to $1600 have made gold attractive again for long-term buyers as a slowdown in the pace of Fed rate hikes looms on the horizon.

A change in the central bank’s rhetoric promises a fresh impetus for buying. At the last meeting, the FOMC raised rates, but Powell said in a press conference that banking problems were cooling the economy as much as policy tightening. Although we have not received formal confirmation, this has cleared the way for a rate change.

Gold’s long-term upside potential is close to $2640, representing 161.8% of the rally from the 2018 lows. Such an ambitious rally requires an impressive run-up, and we are likely witnessing one right now.

Of course, as always in such circumstances, we must be careful that the correction does not turn into a new downward spiral. Such a signal level could now be in the $1930 area. A break below $1900 could be the last nail in the coffin of gold’s bullish outlook, but it is an alternative scenario – not the main one.

FxPro
FxProhttp://www.fxpro.co.uk/?ib=606792
FxPro is an award-winning online broker offering Contracts for Difference (CFDs) on forex, futures, spot indices, shares, spot metals and spot energies. FxPro serves clients in over 150 countries worldwide and offers multilingual customer support 24/5. Trading CFDs involves significant risk of loss.

Featured Analysis

Learn Forex Trading