Gold, XAU/USD Talking Points:
- Gold prices have put in a massive breakout this week to push back above the $2k level, and bulls didn’t stop there as that breakout has driven all the way into $2,050.
- This isn’t the first time that XAU/USD has tested that psychological level and $2,050 even carries some weight as this has been part of a resistance zone that’s been in-play on Gold over the past three years. The question here is whether the 4th time is the charm for Gold bulls.
- Notably there’s never been a monthly close for spot Gold above the $2k level, and there is one trading day left in November after today. It won’t be simple, however, as there’s a release of Core PCE inflation data tomorrow morning that could certainly drive volatility through commodity markets, gold included.
It was a little less than two months ago that gold prices were showing deeply oversold conditions. At the time, USD strength remained the hot button and this had forced bearish moves in several markets, gold included. The RSI indicator moved down below the 20-level, which is somewhat rare as that had only happened a few other times over the past 20 years. As I shared when that took place, such an oversold backdrop could be a hindrance to bearish continuation, and that led into the October NFP report when matters began to shift.
After that NFP report in October, gold printed a bullish outside day, and over the weekend the events in the Middle East began to flare and this prodded a war bid in gold prices when markets re-opened the next week. Gold bulls haven’t really looked back much ever since, save for a pause and a pullback around the November open, which coincided with the most recent FOMC rate decision. That was a clean pullback to find support at prior resistance, but it was the CPI report on November 14th that really excited gold markets as it helped to bring bulls back in the picture and that breakout has just continued to drive ever since.
Now we’re going to see how gold handles some long-term resistance. Price has already pushed up to the $2,050 level and this is a big spot for spot XAU/USD, as this has been resistance in the range that’s held for over three years. I’m tracking the resistance zone from around $2,050 up to $2,081, the latter of which was last in play in early-May, when markets were still holding on to the hope of near-term FOMC rate cuts.
Gold Weekly Price ChartChart prepared by James Stanley, Gold on Tradingview
Gold Breakout – What’s Doing the Driving?
There are a number of commodity markets seeing strength right now and this goes along with what’s become an aggressively bearish sell-off in the USD, which has just moved into oversold territory on the daily chart.
There’s been a clear shift in a number of markets so far in November trade, as the FOMC rate decision was on the first day of the month. Despite the fact that Jerome Powell directly said, “we’re not even talking about rate cuts,” markets have started to price-in rate cuts, with some expectations even building for a move in March.
What confounds this picture is the fact that inflation is still really very elevated. Sure, there has been progress, particularly on headline inflation, but core inflation remains at 4.0% in the US (via CPI) and this is simply an unfavorable backdrop to support looser policy. We’ve heard as much from multiple Fed members but as we saw from yesterday, market participants seem fast to jump on any allusions towards dovishness. Christopher Waller, often considered to lean towards the hawkish side of the continuum, remarked that if inflation continues to move down, then that could support lower rates. But, that’s a big ‘if’ at this point and as we’ve seen from the past month of strength in the risk trade, that ‘if’ is now priced very richly, and this includes gold.
This isn’t too dissimilar from what we saw back in March and April, when spot gold prices set their current all-time-high. At the time, the hope was that a banking crisis in regional US banks would eventually lead to the Fed tempering policy. That didn’t happen, and the Fed talked up more hikes shortly after and this helped to turn gold back into a bearish trend, which lasted all the way through the October open when that deeply oversold backdrop began to appear.
On the topic of inflation, which remains relevant to the rates discussion, we get a really big piece of data tomorrow, and this sets the stage for an interesting close to November trade. Core PCE is often considered as ‘the Fed’s preferred inflation gauge’ and this similarly remains well-elevated beyond the Fed’s 2% target. But, there has been progress, and from progress springs hope – but the ultimate question here is whether that hope may have gotten ahead of itself as driven by the excitement from bulls looking for a turn in Fed policy.
Core PCE Since Jan, 2021
Chart prepared by James Stanley
Despite the numerous tests over the $2k psychological level that we’ve seen in gold since covid came into the picture in 2020, there hasn’t yet been a single monthly close above that price for spot XAU/USD. Each instance has seen sellers push prices back below the big figure before month-end, and tomorrow brings opportunity for bulls to shift that narrative. But, they have to hold through that Core PCE release at 8:30 AM and there are a number of markets showing extremes at the moment. I had mentioned the US Dollar’s oversold state a little earlier, and this shows on the daily chart, but there’s also overbought backdrops in EUR/USD and GBP/USD; and gold is also showing overbought conditions on the daily chart.
This presents a challenging backdrop for continuation and may even begin setting the stage for swing potential. ‘May’ is the operative part of that statement, however, because at this point, bulls haven’t yet shown much for weakness as they’ve continued to drive into that $2,050 level.
Traders need to be careful here as this isn’t a linear equation simply derived from the data outlay. As we’ve seen over the past couple of months, sentiment can be incredibly powerful because, at the end of the day, it’s not CPI or Core PCE or NFP setting prices – it’s market participants making decisions based on the series of facts in front of them.
Gold Monthly ChartChart prepared by James Stanley, Gold on Tradingview
From the daily chart on gold, we can see that RSI is not only overbought, but it’s also started to show divergence. The indicator had moved to overbought ahead of the October close and that helped to bring the pullback to 1832, which bulls pounced on. But now we have higher prices and RSI has moved back in to overbought territory, albeit a lesser overbought read than that prior instance, there’s even more challenge to continuation as the current move has become quite stretched.
This can keep the door open for pullback potential, and those possible higher-low support levels are where we can get a read for how aggressive bulls remain to be.
There’s a zone from around 2018 up to 2022 that remains relevant, and below that we have some prior swings around the 2006 level that appear ahead of a $2k re-test.
If bears can sink price back-below $2k, this breakout will begin to look like a failure, and if this happens on the monthly chart, so it would need to happen quickly with one day left until the close of November, that would be an extended upper wick that would likely look at least somewhat attractive for larger reversal themes.
But – if support shows at 2018-2022, and that hold through month-end, well then we’d have the first ever monthly close above $2k and that would be a large show from bulls who have, so far, shied away from such an instance.
Gold Daily Price ChartChart prepared by James Stanley, Gold on Tradingview
--- written by James Stanley, Senior Strategist