For the last four months, gold has been trending sideways, swinging back and forth between $1,200 and $1,300. Gold is currently testing the top of this range which could end in a major breakout and the start of a new upleg, or a triple top and the start of another downswing. US domestic and international political turmoil plus the Fed’s Jackson Hole conference could keep gold and the US Dollar active through this critical week.
After a big selloff came to an end in December, gold staged a strong recovery through the winter advancing from a low near $1,125 to a peak just short of $1,300 in April. Since then, gold has been consolidating its gains, trending sideways between $1,205 and $1,295.
Bouncing out of a successful test of channel support in early July, gold has been steadily climbing through the summer and is currently challenging channel top resistance. A break through $1,300 would complete the consolidation and signal the start of a new upleg that could challenge resistance near $1,335, $1,350 or a measured $1,385.
On the other hand, a failure would complete a triple top and leave gold vulnerable to a correction that could take it back toward $1,270 initially or even $1,250.
The RSI for gold recently broke out of a downtrend, continues to rise and is NOT overbought. This indicates continuing accumulation and increasing upward momentum as we move into a seasonally more favourable time of the year for gold which runs from now through February.
There are two main factors that could drive trading in gold over the coming week, capital flows in and out of defensive havens, and sentiment toward the US Dollar, which as the world’s premier paper currency, tends to trend in the opposite direction to gold, the world’s premier hard currency.
In recent weeks, political tensions between the US and North Korea have convinced some traders to start taking profits in risk markets like stocks and rotate capital back into defensive havens like gold and JPY. This week starts with the US and South Korea holding annual military exercises which may or may not become a flashpoint.
In addition to international relations, US domestic political turmoil could impact trading in gold. To date a lot of the fighting out there has been noise with limited impact on the economy. Traders appear to be recognizing, however, that ongoing strife may make it difficult to reach agreement on economic issues including tax reform and the budget. The US is about to reach its debt limit which could be the tipping point where the rubber hits the road and the economy could be impacted, particularly if it takes a government shutdown to sort out this mess.
Later this week, the Fed holds its annual Jackson Hole Conference. Fed Chair Yellen and others are scheduled to speak at this forum which the Fed has used in the past to hint at policy direction and changes. This year, the question is whether the Fed is prepared to proceed with normalizing its balance sheet or keep raising rates in the face of soft inflation and potential economic disruptions. This could impact trading in the US Dollar which could then impact gold. The Euro may also be active if ECB President Draghi changes his mind and says anything about tapering its own asset purchase program.
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