Will Gold Bulls Find The Fed’s Silence 'Golden'?

After saturating the airwaves last week with chatter on the merits and demerits of a super-sized interest rate hike for July, Federal Reserve officials are no longer commenting ahead of the July 27 rate decision.

Will gold bulls find the silence 'golden'?

The Fed’s aim of not influencing markets, investors, or its own policy-makers in the run-up to the monthly meeting of its all-important Federal Open Market Committee (FOMC) is well known. 

The FOMC invariably gathers on a Wednesday and Fed officials do not hold any public speaking engagements for 10 days before and until the Thursday after the meeting.

Depending on the flow of news and data, gold can move up to a hundred dollars an ounce or more at a time like this. But it can also be boxed in a trading range of $10 or less, if it had moved a lot prior to the blackout period—which appears to be the case this time.

Charts by skcharting.com with data powered by Investing.com 

Since this week began, the most-active gold futures contract on New York’s COMEX, August, settled Monday’s trade up $6.60, or 0.5%, at $1,710.20 an ounce—only to give most of it back in Tuesday’s pre-US session in Asia. 

Prior to that, August gold plumbed an 11-month low of $1,695 on Thursday on the strength of the dollar. It had fallen without stop in five previous weeks, losing a cumulative 9% in its longest bearish streak since 2018. Year-to-date, the gold benchmark is down 7%.

The dollar hit near 20-year highs last week after the US Consumer Price Index came in at a four-decade peak of 9.1% for the year to June, prompting some money market traders to bet on a record 100-basis point Fed rate hike for July. The expectation has since lowered to consensus for a 75-basis point hike. 

As a result, the Dollar Index, which pits the greenback against six major currencies, has been knocked off the 2002 peak of above 109 that it hit last week. 

In Tuesday’s Asian trading, the dollar took another dip, hovering at under 107. A strong dollar typically dents demand for dollar-denominated commodities from buyers using other currencies. The opposite happens when the dollar tumbles.

Despite the dollar’s slide, gold’s malaise has continued this week—an indication that this period of Fed silence might not turn out to be a boon for longs in the space.

Adding to the vacuum of Fed speak was an unusually light week for US macroeconomic data that allowed traders greater discretion on fund flows and trade volumes. While gold bulls have an even chance of seizing the momentum, it appears that inaction has been the greater part of their valor. 

Said Jeffrey Halley, who oversees Asia-Pacific for online broker OANDA: 

“Gold’s inability to hold onto even modest rallies in prices, even as the US dollar falls and US bonds trade sideways, is a major concern in my opinion. It suggests that risks remain heavily skewed towards the downside.” 

“It seems that only a much deeper correction lower by the US Dollar will grant gold a stay of execution.”

Gold, in Halley’s opinion, has first support at $1,700, followed by the more important $1,675 level. 

He adds: 

“A sustained failure of $1,675 will signal a much deeper move lower, targeting the $1,450 to $1,500 regions in the weeks ahead. Gold has resistance nearby at $1,725 and then $1,745.”

James Stanley, a precious metals strategist who blogs on the Daily FX forum, said he kept a neutral forecast for gold this week, “largely on the basis of the primary trend appearing to be at a pause point.” 

He adds: 

“A five-week sell-off is encouraging for sellers, but with price angling up to support around two-year-lows, a clean breach didn’t seem probabilistic enough to retain a bearish forecast. It does appear as though there’s some counter-trend potential for this week and that can keep the door open for a move up to lower-high resistance for longer-term themes.” 

As an alternative approach, Stanley said the potential for bearish breakouts does remain in the event that sellers can take out 1695 in short-order. 

“In that event, follow-through support shows up at the two-year-low of $1,680 for short-term breakout strategies.”

Sunil Kumar Dixit, chief technical strategist at skcharting.com said COMEX’s drop to $1,695 last week and minor bounce back since to $1,724 will likely keep gold tied to a $30 range.

“On the upper side, trading above $1,712 will guide the metal towards $1,720 and a peak of $1,763 level, which, if breached, could see $1,780 and $1,810."

“However, the downside risk is still as strong for a retest of swing low of $,1697, which opens doors towards the 50-Month Exponential Moving Average of $1,666 and the 200-Week Simple Moving Average of $1,655.”

Investing.com’s own technical studies show a daily stochastic reading of 10/8 and weekly stochastic indication of 4/3 for gold that signals a potential rebound towards the $1760-$1,800 level, before any major drop below $1,700.

Gold’s monthly stochastic reading of 6/26, meanwhile, suggests a follow-up to the sub-$1,700 levels that could reach $1,680-$1,665-$1,655 before any positive outlook emerges.

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Disclaimer: Barani Krishnan uses a range of views outside his own to bring diversity to his analysis of any market. For neutrality, he sometimes presents contrarian views and market variables. He does not hold positions in the commodities and securities he writes about.