Breaking News
Investing Pro 0
NEW! Get Actionable Insights with InvestingPro+ Try 7 Days Free

Chart Of The Day: Fed's Aggressive Path Overshadows Gold's Inflation Edge

By Pinchas Cohen/Investing.comCommoditiesSep 22, 2022 07:39AM ET
www.investing.com/analysis/chart-of-the-day-feds-aggressive-path-overshadows-golds-inflation-edge-200630172
Chart Of The Day: Fed's Aggressive Path Overshadows Gold's Inflation Edge
By Pinchas Cohen/Investing.com   |  Sep 22, 2022 07:39AM ET
Saved. See Saved Items.
This article has already been saved in your Saved Items
 
 
XAU/USD
+0.32%
Add to/Remove from Watchlist
Add to Watchlist
Add Position

Position added successfully to:

Please name your holdings portfolio
 
DX
+0.18%
Add to/Remove from Watchlist
Add to Watchlist
Add Position

Position added successfully to:

Please name your holdings portfolio
 
Gold
+0.13%
Add to/Remove from Watchlist
Add to Watchlist
Add Position

Position added successfully to:

Please name your holdings portfolio
 
US2YT=X
-1.73%
Add to/Remove from Watchlist
Add to Watchlist
Add Position

Position added successfully to:

Please name your holdings portfolio
 

Gold traders had a wild ride in Wednesday's trade after the US Federal Reserve Fed hiked interest rates another jumbo 0.75%, making it the third hike in a row for the US central bank. The yellow metal sold off after the announcement. Gold bulls and bears might be duking it out, depending on their focus. Gold is considered to be an inflation hedge but the dollar is becoming increasingly attractive as its yield increases.

The Fed clarified that it would keep raising rates "until the job is done," signaling the possibility that even a recession will not stop it as it remains focused on achieving price stability.

After its historic miscalculation on inflation last year, saying it was "transitory," the Fed may now have a chip on its shoulder which makes it defensive to any suggestion that it is not taking inflation seriously enough. 

Today, gold is climbing for the second day, suggesting inflation-hedgers are winning, although Putin's increased aggression against Ukraine may also have played a part in the haven's rising demand. However, I think this rise is almost certainly temporary.

If we are to trust the bond market, it appears that the interest rate theme is overshadowing inflation. The 2-year Treasury yield surged past 4.1%, its highest level since 2007 as bondholders sold off underlying Treasuries, expecting that continuously rising rates would diminish current bond yields.

Now, let's look at the chart to understand why gold is rising.

Gold Daily
Gold Daily

The first thing that hits the viewer is that the precious metal is in a long-term downtrend, where the buying and selling limits are marked in a falling channel. Note how the initially shorter boundary's (dotted line) resistance turned to support. However, I'm not keen to widen the channel to include the August high after gold posted a new low, extending the track.

Gold completed a rising flag from Aug. 31 to Sept. 13, a period when early bears cover, buying back the instrument from newer bears. After the short squeeze was over, the flag broke to the downside, extending the downtrend, especially after posting a new low below July 21. The flag pole measures the price's target, the sharp drop preceding the flag, and is $79.70. Given that the flag breakout point was $1,710, it targets $1,630.3.

If that scenario plays out, it suggests that the current congestion, another continuation pattern, will also complete with a downside breakout. The pennant's implied target by the same method as the flag is an $84.50 drop from the point of escape, retesting the $1,600 levels.

Gold Weekly
Gold Weekly

However, if this technical chain of events plays out it will complete a much more significant pattern—a giant double top, between August 2020 all-time high and the March 2022 peak. Note that the weekly price is trading below its 200-week moving average (MA). That also happened in 2016 and 2018. However, since the price created a bottom—and fundamentally the dollar did not yield—there was no significance to these crosses.

Conversely, gold plunged 28% in 2013, ending a 12-year bull run, as investors unwound hedges against the weaker dollar when the Fed was purchasing bonds to increase inflation. The price fell below the 200 daily MA that April, and despite already losing 25% since its September 2011 then-all-time high, it plummeted 18% in the following 11 weeks and as much as 27% since crossing the 200 daily MA until it bottomed in November 2015.

Based on its height, the double top's implied target is $1,275.

Trading Strategies

Conservative traders should wait for the pennant to complete, then confirm its integrity with a return move.

Moderate traders would wait for the return move, just for a closer entry to resistance, not necessarily for additional confirmation.

Aggressive traders could short like moderate traders or from the pennant's top.

Trade Sample - Aggressive Short

  • Entry: $1,686
  • Stop-Loss: $1,698
  • Risk: $12
  • Target: $1,626
  • Reward: $60
  • Risk-Reward Ratio: 1:5

Disclaimer: At the time of publication the author had no positions in the stocks mentioned. 

Chart Of The Day: Fed's Aggressive Path Overshadows Gold's Inflation Edge
 

Related Articles

Chart Of The Day: Fed's Aggressive Path Overshadows Gold's Inflation Edge

Add a Comment

Comment Guidelines

We encourage you to use comments to engage with other users, share your perspective and ask questions of authors and each other. However, in order to maintain the high level of discourse we’ve all come to value and expect, please keep the following criteria in mind:  

  •            Enrich the conversation, don’t trash it.

  •           Stay focused and on track. Only post material that’s relevant to the topic being discussed. 

  •           Be respectful. Even negative opinions can be framed positively and diplomatically. Avoid profanity, slander or personal attacks directed at an author or another user. Racism, sexism and other forms of discrimination will not be tolerated.

  • Use standard writing style. Include punctuation and upper and lower cases. Comments that are written in all caps and contain excessive use of symbols will be removed.
  • NOTE: Spam and/or promotional messages and comments containing links will be removed. Phone numbers, email addresses, links to personal or business websites, Skype/Telegram/WhatsApp etc. addresses (including links to groups) will also be removed; self-promotional material or business-related solicitations or PR (ie, contact me for signals/advice etc.), and/or any other comment that contains personal contact specifcs or advertising will be removed as well. In addition, any of the above-mentioned violations may result in suspension of your account.
  • Doxxing. We do not allow any sharing of private or personal contact or other information about any individual or organization. This will result in immediate suspension of the commentor and his or her account.
  • Don’t monopolize the conversation. We appreciate passion and conviction, but we also strongly believe in giving everyone a chance to air their point of view. Therefore, in addition to civil interaction, we expect commenters to offer their opinions succinctly and thoughtfully, but not so repeatedly that others are annoyed or offended. If we receive complaints about individuals who take over a thread or forum, we reserve the right to ban them from the site, without recourse.
  • Only English comments will be allowed.

Perpetrators of spam or abuse will be deleted from the site and prohibited from future registration at Investing.com’s discretion.

Write your thoughts here
 
Are you sure you want to delete this chart?
 
Post
Post also to:
 
Replace the attached chart with a new chart ?
1000
Your ability to comment is currently suspended due to negative user reports. Your status will be reviewed by our moderators.
Please wait a minute before you try to comment again.
Thanks for your comment. Please note that all comments are pending until approved by our moderators. It may therefore take some time before it appears on our website.
Comments (7)
Mr Doodl
Mr Doodl Sep 25, 2022 6:29AM ET
Saved. See Saved Items.
This comment has already been saved in your Saved Items
If gold reaches 1275 $ and technicals work often perfectly, I can't imagine what level the USD Index will be. 160s like in the 80s? The giant H&S pattern in monthly charts of Euro, GBP and JPY show at least some clues in this direction. JPY may cross 200, GBP may fall below parity to 0,92.
EL LA
EL LA Sep 22, 2022 11:50AM ET
Saved. See Saved Items.
This comment has already been saved in your Saved Items
Gold is gold. It isn't an investment. It's a timeless and perfect store of wealth. The cheaper you can buy it using your paper currency the better, especially if you are a country or a king.
Alan West
Alan West Sep 22, 2022 11:50AM ET
Saved. See Saved Items.
This comment has already been saved in your Saved Items
No one with a brain keeps their assets in ‘paper currency’. They keep them in property and stocks, both of which have thrashed gold.
Dino Nguyen
Dino Nguyen Sep 22, 2022 10:39AM ET
Saved. See Saved Items.
This comment has already been saved in your Saved Items
I hope you will be right prediction
Gonzalo Ribeiro
Gonzalo Ribeiro Sep 22, 2022 10:32AM ET
Saved. See Saved Items.
This comment has already been saved in your Saved Items
$1275... what a buying opportunity would that be. I find it unlikely, but I would definitely welcome it
Kevin Mould
Kevin Mould Sep 22, 2022 9:48AM ET
Saved. See Saved Items.
This comment has already been saved in your Saved Items
Keep in mind that physical gold is still a good purchase, the dollar is on a bull run. When that ends gold will go back up. It would be a wise investment to accumulate 10% physical gold in your portfolio right now.
Pwr Strk
Pwr Strk Sep 22, 2022 9:01AM ET
Saved. See Saved Items.
This comment has already been saved in your Saved Items
what in the world, Pinkas, I'm gonna have to sell even my jewelry
Rajesh Upadhyay
Rajesh Upadhyay Sep 22, 2022 8:29AM ET
Saved. See Saved Items.
This comment has already been saved in your Saved Items
Yes, if FEDS is successful to keep $ strong than definitely Gold can go down to $1200..But for that FEDS have to Raise Intrest Rate to minimum 7 to 8 % Will, When & how fast depends on FEDS integrity, and Guts. Your Analysis is detailed & almost possible. Thanks.
 
Are you sure you want to delete this chart?
 
Post
 
Replace the attached chart with a new chart ?
1000
Your ability to comment is currently suspended due to negative user reports. Your status will be reviewed by our moderators.
Please wait a minute before you try to comment again.
Add Chart to Comment
Confirm Block

Are you sure you want to block %USER_NAME%?

By doing so, you and %USER_NAME% will not be able to see any of each other's Investing.com's posts.

%USER_NAME% was successfully added to your Block List

Since you’ve just unblocked this person, you must wait 48 hours before renewing the block.

Report this comment

I feel that this comment is:

Comment flagged

Thank You!

Your report has been sent to our moderators for review
Continue with Google
or
Sign up with Email