Gold Price Talking Points

The price of gold trades near the 2020 high ($1818) despite the ongoing contraction in the Federal Reserve’s balance sheet, and the Relative Strength Index (RSI) may continue to flirt with overbought territory as the indicator clings to the upward trend carried over from the previous month.

Gold Price Holds Near 2020 High as RSI Flirts with Overbought Zone

The price of goldhas traded to fresh yearly highs during every single month so far in 2020, with bullion clearing the 2012 high ($1796) earlier this month as the RSI established an upward trend in June.

The indicator may show the bullish momentum gathering pace if it rebounds from trendline support and produces the extreme readings seen in February, but the bullish behavior may persist throughout the second half of 2020 as the Federal Reserve vows to “increase its holdings of Treasury securities and agency MBS (Mortgage-Backed Security) and agency CMBS (Commercial Mortgage-Backed Security) at least at the current pace.”

It seems as though the Federal Open Market Committee (FOMC) will rely on its lending facilities as well as its asset purchases to support the US economy as the central bank shows little interest in adopting a yield caps or targets (YCT) policy, and the recent contraction in the Federal Reserve’s balance sheet may end up being short lived as the reduction is largely driven by a decline in liquidity swaps.

Image of Federal Reserve balance sheet

In turn, current market conditions may keep the price of gold afloat as the US economyis likely to need support from highly accommodative monetary policy for some time,” and the FOMC may continue to endorse a dovish forward guidance at the next interest rate decision on July 29 as Fed officials appear to be ruling out a V-shape recovery.

Atlanta Fed President Raphael Bostic warns that the US economy may not return to pre-pandemic conditions “until mid-2021 or maybe later into 2022” during a video conference with The Tax Policy Center, with the official going onto say that there are going to be “bumps along the way as we learn things about how the virus is progressing.”

With that said, it seems as though Chairman Jerome Powell and Co. are in no rush to alter the forward guidance for monetary policy, and the low interest rate environment along with the ballooning central bank balance sheets may continue to act as a backstop for the price of gold as market participants look for an alternative to fiat-currencies.

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Gold Price Daily Chart

Image of gold price daily chart

Source: Trading View

  • The technical outlook for the price of gold remains constructive as it trades to fresh yearly highs during every single month so far in 2020, with the bullish behavior also taking shape in July as precious metal tags a new 2020 high ($1818).
  • The price of gold cleared the 2012 high ($1796) as the Relative Strength Index (RSI) established an upward trend in June, and the indicator may continue to offer a bullish outlook if it rebounds from trendline support and produces the extreme readings seen in February
  • Still need a break/close above the $1822 (50% expansion) region to open up the $1857 (61.8% expansion) area, but lack of momentum to hold above $1786 (38.2% expansion) may generate a larger pullback in the price of gold, with the first area of interest coming in around $1754 (261.8% expansion) followed by the Fibonacci overlap around $1733 (78.6% retracement) to $1743 (23.6% expansion).

— Written by David Song, Currency Strategist

Follow me on Twitter at @DavidJSong

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