Chart of the Week: Gold takes off as FOMC speculation takes a dovish turn
Gold has roared back to life in a big way. The weak nonfarm payrolls report put an end to speculation on a June US interest rate hike sending USD plunging and gold screaming higher. Gold may remain active in the coming weeks ahead of the June 15th FOMC meeting and also the June 23rd Brexit referendum which could spark significant action in USD and capital flows in and out of defensive havens.
A month ago, gold peaked near $1,300 when a new high in the price was not confirmed by the RSI, a negative divergence that suggested upward momentum was slowing. Through the month of May, a big correction unfolded in gold.
Recently, however, the yellow metal stabilized near $1,200 and now a rebound appears to be underway. After an initial move up toward $1,215, gold spiked up through $1,225 and rallied on toward $1,243 where it has been testing Fibonacci resistance and its 50-day average. Meanwhile RSI has spiked up to 50 indicating downward pressure fading and an upturn pending. Next potential upside tests appear near $1,261 then $1,282.
The gold selloff in May was mainly driven by an advancing USD on speculation that the Fed could be set to raise interest rates in June or July. Weak nonfarm payrolls put that to rest for now, sending USD lower and gold higher. This adjustment may continue to play out in the coming week.
It appears the doves at the Fed are regaining strength. On Friday Governor Brainard argued for a delay until there is more data to support one. On Monday, Fed Chair Yellen gets the last word in before the pre-meeting blackout. It will be interesting to see if she takes a more dovish turn in her comments or not. There are two ways the data showing low payrolls growth and falling unemployment rate can be read. Either the US economy is really, weak, or the US is approaching full employment. A dovish turn could keep the gold party going while a neutral or hawkish tone could put an end to it pretty quick.
With less than three weeks to go until the June 23 Brexit referendum, sentiment surrounding the vote could influence the gold price. Gold tends to act as a haven for capital in times of uncertainty, so one may expect that with polls pointing toward a very close finish that could go either way as potentially sparking inflows of capital into gold JPY and CHF. On the other hand, a lack of inflows would indicate that traders are increasingly ignoring the global establishment’s scare campaign recognizing the cries of doom as increasingly overdone and tiresome.