Gold Price Talking Points

The price of gold has traded to fresh yearly highs during every single month so far in 2020,and the bullish behavior looks poised to persist as the Relative Strength Index (RSI) pushes into overbought territory.

Gold Price Rally Pushes RSI Indicator Into Overbought Territory

The price of gold continues to trade to a fresh yearly high ($1818) in July, and recent developments in the RSI suggest the bullish momentum is gathering pace as the indicator establishes an upward trend and breaks above 70 for the first time since February.

Current market conditions may keep bullion afloat as the Federal Reserve’s Main Street Lending program becomes “fully operational,” and it seems as though the central bank will rely on itslending facilities as well as its balance sheet to support the US economy as the Federal Open Market Committee (FOMC) 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.”

Looking ahead, it seems as though the FOMC will retain the dovish forward guidance at the next interest rate decision on July 29 as “the economy is likely to need support from highly accommodative monetary policy for some time,” and more of the same from Chairman Jerome Powell and Co. may boost the appeal of gold as the central bank pledges to “maintain the target range for the federal funds rate at its present level until policymakers were confident that the economy had weathered recent events and was on track to achieve the Committee’s maximum-employment and price-stability goals.

In turn, 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, and it remains to be seen if the FOMC will alter the forward guidance later this year as Fed officials insist that “it will be important in coming months for the Committee to provide greater clarity regarding the likely path of the federal funds rate and asset purchases.”

Until then, 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 opening range for 2020 instilled a constructive outlook for the price of gold as the precious metal cleared the 2019 high ($1557), with the Relative Strength Index (RSI) pushing into overbought territory during the same period.
  • A similar scenario materialized in February, with the price of gold marking the monthly low ($1548) during the first full week, while the RSI broke out of the bearish formation from earlier this year to push back into overbought territory.
  • However, the monthly opening range for March as less relevant amid the pickup in volatility, with the decline from the monthly high ($1704) leading to a break of the January low ($1517).
  • Nevertheless, the reaction to the former-resistance zone around $1450 (38.2% retracement) to $1452 (100% expansion) instilled a constructive outlook for bullion especially as the RSI reversed course ahead of oversold territory and broke out of the bearish formation from February.
  • In turn, gold cleared the March high ($1704) to tag a new yearly high ($1748) in April, with the bullish behavior also taking shape in May as the precious metal traded to a fresh 2020 high ($1765).
  • The bullish behavior carried into June as the reversal from the May low ($1670) produced a break of the monthly opening range and pushed the price of bullion to a fresh 2020 high ($1786), with the trend also taking shape in July as the precious metal trades to a fresh yearly high ($1818).
  • The price of gold carves a series of higher highs and lows after clearing the 2012 high ($1796), but need a break/close above the $1822 (50% expansion) region to open up the $1857 (61.8% expansion) area.
  • Will keep a close eye on the RSI as it establishes an upward trend and pushes into overbought territory, and the bullish behavior in the price of gold may persist as long as the oscillator holds above 70.

— Written by David Song, Currency Strategist

Follow me on Twitter at @DavidJSong

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