Will Central Bank Buying Save Gold Prices From Hawkish Fed Pressures?

Quick overview

Gold spot is hovering in a very tight, risk-aware range around $4,525.55, edging up a negligible 0.08% in the wake of mixed macro prints. The precious metal is traversing a textbook flag formation within a parallel downtrend channel as investors jockey between a dip in the near term in geopolitical safe haven buying and persistent buying from institutional investors.

Factors Driving the Markets

1. Tough Macroeconomic Environment: Last month’s hotter-than-expected inflation report is impacting non-yielding assets. The lingering inflation data is influencing the markets to be more restrictive about a more aggressive Federal Reserve policy under its recently announced new chair Kevin Warsh.
2. Persistent Buying by the Official Sector: Central banks are continuing to build up their gold reserves. The People’s Bank of China, for example, has bought precious metal for the 17th consecutive month in a row. Other central banks and other emerging-market institutions are also increasing their gold holdings.
3. Fragile Truce: The ceasefire deal between the United States and Iran has now lasted more than six weeks, and there is growing optimism that it might be a step toward peace. A steady stream of energy is being transported safely through the Strait of Hormuz. Although there has been a drop in the premium paid for safe haven assets in the short term due to this truce, there is still a strong bid in the structural safe haven space because of the ongoing fragility of the truce itself.

Gold (XAU/USD) Technical Analysis

Gold is in a very tight range, having just formed a bullish hammer candlestick, leading to a solid intraday rebound following the retest of the 0.5 Fibonacci retracement at $4,512 as well as the bottom of the parallel channel.

The higher lows pattern continues to be visible, staying comfortably above the strong support at the 0.618 Fibonacci retracement level. The momentum oscillator is holding at a neutral level of 51 and appears to be setting up a nice bullish divergence in the wake of the drop. This indicates a significant amount of selling fatigue, with a likely breakout on the cards.

Resistance: $4,532, $4,543-$4,546 (Red MA), and $4,571 (Blue MA) (swing highs)

Support: $4,512 (0.5 Fib), $4,498 (0.618 Fib), and a very important horizontal support at $4,480

Trade Idea

The formation of the price pattern, as the local downtrend line approaches the top, suggests the following buy trade:

Order: Buy stop over $4,532

Targets: $4,543 (Target 1), $4,571 (Target 2)

Stop Loss: Below $4,512 (a strong structural support point)

Conclusion

Gold is in a major consolidation phase as it prepares for another major leg of the move. As the conflicts in the Middle East have cooled down somewhat, the price gains have slowed down somewhat, but the continued diversification of central banks into gold as part of their reserves, along with its long term usefulness as an inflation hedge, has created a strongly bullish long term outlook. Investors should expect some volatility in the coming days in advance of the release of data on retail sales and speeches by Federal Reserve officials. Further downside in the current channel creates more opportunities for institutions to build long positions as long-term debt levels around the world rise to push the broader market up.

ABOUT THE AUTHOR See More

Arslan Butt

Lead Markets Analyst – Multi-Asset (FX, Commodities, Crypto)

Arslan Butt serves as the Lead Commodities and Indices Analyst, bringing a wealth of expertise to the field. With an MBA in Behavioral Finance and active progress towards a Ph.D., Arslan possesses a deep understanding of market dynamics. His professional journey includes a significant role as a senior analyst at a leading brokerage firm, complementing his extensive experience as a market analyst and day trader. Adept in educating others, Arslan has a commendable track record as an instructor and public speaker. His incisive analyses, particularly within the realms of cryptocurrency and forex markets, are showcased across esteemed financial publications such as ForexCrunch, InsideBitcoins, and EconomyWatch, solidifying his reputation in the financial community.

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