Gold price has been stagnating over the past 12 months after the peak during the beginning of the Covid-19 global pandemic. The top in Gold corresponds with FED's decision to slash the interest rates to zero and start the stimulus programme to help the economy. Since then the price has been drifting lower, possibly morphing into a triangle pattern.
This analysis will shed more light on Gold's behavior after the upcoming FED meeting:
How to position for a short-term bullish case?
How to position for a bearish medium-term scenario?
Before discussing the technical outlook of Gold chart, let's review briefly the key fundamental points every trader and investor should be familiar with and aware of.
On the November 3rd meeting, the FED is expected to deliver further clarity on these 4 main topics:
Temporary vs. Persistent inflation.
Economic outlook for the 2022.
Tapering of the stimulus.
Rate hikes.
The tapering of the bond buying is most likely priced-in and will start as soon as next month. They are planning to taper $15 billion per month until next summer (July 2022). The stock market and Gold reacted fairly well towards this announcement. So far, so good. What's the concern now? The fog of war is clouding over the inflation which is affecting economic growth through the supply chain issues and raise in prices. We don't intend to analyze the fundamentals here but if you wish to read more on this topic, try this Bloomberg article. If the FED's wording changes from temporary to persistent until next year, they will be forced to raise interest rates sooner than projected.
The interest rates are projected to be increased near the end of 2022, however, depending on inflation fluctuations, it may come as soon as next summer. If during the November 3rd meeting, we get the persistent inflation wording then Gold price will most likely suffer a short-term shock together with the stock market indices.
The worst combination for the stock market and the next year will be the following formula:
persistent inflation (CPI above 3.7%) + slow economic growth (GDP less than 4%) + struggling labour market (churning NFP) = stagflation.
Let's review the technical aspect of Gold price by analyzing the following chart which later in the article will be broken down according to the two scenarios:
Gold Daily Technical Chart
Scenario A: The Bullish Case
In this scenario, Gold is trading inside a major triangle pattern which started August last year and it is projected to end in the Q1 of 2022. It is important for price not to drop below 1720 low for this case to remain valid.
Under this scenario, we are inclined to buy the recent pullback close to 1755 (61.8% retracement) with stop below 1720 and target around 1850-1880 (100% measured move). What needs to happen, fundamentally, for the Gold price to rally so high after summer 2022? The FED will make sure to change their wording to "inflation levels will tend to ease off in the coming months" rather than keep stating "inflation levels may remain elevated for a longer period than expected." In addition, the FED statement needs to clarify the rate hikes matter too. Hence, they may extend the period of the hikes to Q1 or Q2 of 2023 if they believe maximum employment needs more time for some catching up (unemployment currently at 4.7%, ideal below 4%).
Scenario B: The Bearish Case
Conversely, if Gold fails to push above 1800 and instead continues to slide below 1750, we will be inclined to give the bearish view more weight and adjust our short-term positioning to a sell. Therefore, once we get a confirmation of a breach below 1750, we can start a short position with stop above the recent swing high at 1815 and target the following support levels: 1580 - 1520 and 1450. What needs to happen, fundamentally, for the Gold price to under-perform so much in the coming weeks 2022? The FED needs to follow Bank of Canada's wording regarding inflation, "inflation levels may be persistent for longer than expected and may warrant a rate hike as soon as July/September 2022 after the bond tapering ends." In addition, if the FED is positive about the labour market and employment levels, this too can increase the probability of a rate hike sooner than anticipated. In our view, the recent US market data do not support such events unfolding yet, and as such, this bearish view remains as our alternative strategy, nevertheless, we are flexible in our view and keep amending as new price information enters the market.
To recap the analysis, the meeting point for both scenarios (or the line in the sand, LIS) short-term becomes the 1750 and 1720 support zone. Buyers must protect the 1750 level at all cost, and on the other side, sellers must make sure to violently breach that mark. Make sure to follow price developments starting from this coming week for further clues in the Gold market.
And, that's a wrap!
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Until the next time, "Be a Mindful Trader!"
IWT Team!