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New Dawn For Gold Bulls With U.S. Fed Rate Hikes Peaking?

By Barani Krishnan/Investing.comCommoditiesJul 29, 2022 04:43AM ET
www.investing.com/analysis/new-dawn-for-gold-bulls-with-us-fed-rate-hikes-peaking-200627802
New Dawn For Gold Bulls With U.S. Fed Rate Hikes Peaking?
By Barani Krishnan/Investing.com   |  Jul 29, 2022 04:43AM ET
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  • First US recession since pandemic signals Fed will stop super-sized rate hikes
  • Dollar, Treasury yields weaken, opening bullish path for gold
  • Chartists say yellow metal must hold above $1,750 in order not to unravel rally

Will the United States’ first re-entry into recession since the coronavirus pandemic—even if that recession is just technical—herald a new dawn for gold bulls?

A recession means different things to different investors.

For the long-oil crowd, it might be time to be less presumptuous about demand, given the strong correlation between the economy and energy usage.

For those on Wall Street, it could be an opportunity to chase up beaten down stock prices, on the reasoning that Federal Reserve rate hikes might be more benign from here.

Likewise, for gold bulls, it is a sign perhaps some serious hedging against inflation will begin now in the yellow metal.

Gold had its biggest one-day rally since March after the Commerce Department reported a 0.9% decline in the first of its three estimates for second quarter US gross domestic product (GDP) growth. The estimate followed a drop of 1.6% established for the first quarter.

The back-to-back quarterly declines in GDP confirmed officially—or at least, technically—months of speculation that the United States was headed for a recession.

It unleashed at once buying that had been pent-up in gold for most of this year, after weeks and weeks of pedestrian moves that sometimes resulted in a daily change of not more than a couple of dollars in both COMEX futures and physical bullion.

Gold is supposed to be a hedge against inflation, but it has not been able to hold up to that billing for most of the past two years since hitting record highs above $2,100 in August 2020. One reason for that has been the rallying dollar Index

Gold 4-Hour
Gold 4-Hour

Charts by skcharting.com, with data powered by Investing.com

The dollar, a contrarian trade to gold, had a screaming rally over the past year, declining in just three months. For this year, it remains up almost 11%, after a 6% gain in 2021.

But the index, which pits the greenback against six other major currencies, has declined nearly 2% over the past two weeks alone, with the slide accelerating since the Fed on Wednesday opted for a 75 basis point (bps) increase for its fourth rate hike of the year instead of the 100 bps hike anticipated earlier. The smaller increase was a sign that the central bank may have reached a peak in the outsized rate hikes it has been doing to beat inflation raging at 40-year highs.

US bond yields, measured by the benchmark 10-year note, have also retreated in the past three weeks, allowing gold to step up to the fore.

In Thursday’s trade, COMEX gold’s benchmark front-month contract for August delivery settled up $31.20, or 1.8%, at $1,750.30 an ounce, after a session peak at $1,755. That was the largest one-day gain in COMEX gold since March 8, which marked the period of upswing for most commodities in the aftermath of the Ukraine invasion.

Gold’s rally extended in Friday’s Asian trading, with COMEX’s front-month contract reaching a more than three-week high of nearly $1,764 at the time of writing.

Ed Moya, analyst at online trading platform OANDA, said since the start of 2022, gold’s biggest risk had been a robust economy and a Fed that might need to be more aggressive with rate hikes.

Moya said gold could likely face strong resistance at around the $1,800 level. But till then, the next $50 upswing could be relatively easy. He added:

“The risk of a full-percentage rate hike by the Fed is long gone. Gold is breaking out now that a peak in Treasury yields is firmly in place. Stagflation is here to stay and that should be good news for gold prices. The US economy is heading towards a recession and as long as Wall Street believes the Fed will deliver a slower pace of tightening, gold should start seeing safe-haven flows again.”

Gold Daily
Gold Daily

Christopher Vecchio, a precious metals strategist who blogs on Daily FX, appeared to hold a similar view, saying:

“Forward looking measures of inflation suggest that peak inflation is in the rear-view mirror, and the 2Q’22 US GDP report indicated that the economy is slowing (recession or not, there’s no reason to quibble over the technical definition). These facts beget a relatively more dovish Fed moving forward, whereby even if there are more rate hikes, they’re unlikely to be at the same 75-bps pace we’ve seen over the past two meetings.”

Vecchio described these as “monumental developments” for gold that could translate into a weaker dollar or at least one that’s less likely to continue its meteoric rise moving forward.

“But primarily, these developments mean that US real yields are likely to fall back in the near-term. If rising US real yields underpinned the rationale for weaker gold prices coming into 3Q’22, then falling US real yields means that it’s time to look in the other direction for gold prices—and throw away the 3Q’22 gold price forecast in the process now that the August 2021 near $1,680 was achieved.”

So, what really is the immediate outlook for gold prices then?

Like Moya, Vecchio does not anticipate gold having problems returning to $1,800 in the coming sessions.

“A double top remains in place, but a quadruple bottom around $1,680 warrants a reconsideration: a massive sideways range between $1,680 and $2,075 may have formed. A bounce from $1,680 sees $1,800 as the first area before resistance is found.”

Gold Weekly
Gold Weekly

Sunil Kumar Dixit, chief technical strategist at skcharting.com, said holding above $1,750 is critical, failing which gold could drop to between $1745 and $1,735.

Breaking it down, Dixit, who uses the spot price of bullion for his technicals, says two four-hour charts held the key to gold’s advance.

The first was the regular four-hour chart that showed gold approaching wave 3 of the impulsive 1-2-3-4-5 wave pattern coinciding with the 200-Simple Moving Average of $1,772 on the four-hour chart.

The second was an intraday four-Hour chart indicating the Relative Strength Index at 77 and stochastics at 97/96 that will cause an intraday consolidation towards $1,745 support. Dixit adds:

“Some profit-booking may be due from overbought stochastics and an overstretched RSI that could see gold coming down towards the $1745-1735 level for it to gain energy and relaunch towards its next target, which is the 50-Day Exponential Moving Average of $1785.”

“The daily chart’s RSI at 53 is in the above-neutrality area, while stochastics at 96/89 have further potential for an upside move towards the 50-Day EMA of $1,785.”

Disclaimer: Barani Krishnan uses a range of views outside his own to bring diversity to his analysis of any market. For neutrality, he sometimes presents contrarian views and market variables. He does not hold positions in the commodities and securities he writes about.

New Dawn For Gold Bulls With U.S. Fed Rate Hikes Peaking?
 

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New Dawn For Gold Bulls With U.S. Fed Rate Hikes Peaking?

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Comments (5)
Tims Mopheme
Tims Mopheme Jul 31, 2022 9:56AM ET
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The dollar is rotten zero value Russia wins
Surya Dev Yadav
Surya Dev Yadav Jul 29, 2022 11:20AM ET
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Sir, please let me know now where Gold will go, it will go up or down
Edward Chong
Edward Chong Jul 29, 2022 11:20AM ET
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haha ask your lord.
SunilKumar Dixit
SunilKumarDixit Jul 29, 2022 11:20AM ET
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Surya Dev Yadav. As long as Gold sustains above 1750, the uptrend is expected to take Gold up towards 1770-1777-1785 & 1800
Mr Doodl
Mr Doodl Jul 29, 2022 11:20AM ET
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You must be really intelligent
Doyle Johnson
Doyle Johnson Jul 29, 2022 8:19AM ET
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I'm looking forward at crude oil prices as we (the world) is likely entering a recessionary period. Who will be in charge, the supply side or the demand destruction side? Even as the US & Europe continue to release oil from their SPR,... global inventories continue to fall, what's going on?, Some opinions that I respect like Phil Flynn & Amirta Sen think oil will continue tight at the $100 plus range. I read you most every day and respect your opinions across several commodities, what do you see for oil in the next few months? Thanks, Doyle Johnson
Barani Krishnan
Barani Krishnan Jul 29, 2022 8:19AM ET
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Hello Doyle, thanks for the question. The most logical thing I can say it that it's going (looking at today's rebound vs yesterday's dip) but that doesn't add any value to what you're seeking. To me, the huge gasoline build of about 11 mln barrels during the two weeks to July 8th and 15th is an indicator of demand destruction despite last week's 3 million plus drop. It tells you that Americans are being increasingly discretionary with travel and tank fill-ups from gas north of $4. With kids back in school in two to three weeks, summer jaunts could increasingly drop. That to me is an indication that prices should be close to $90 or below, regardless of OPEC ministrations.
Barani Krishnan
Barani Krishnan Jul 29, 2022 8:19AM ET
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Doyle, I meant to say that oil is going to be volatile, of course.
Doyle Johnson
Doyle Johnson Jul 29, 2022 8:19AM ET
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Barani Krishnan  Thanks Barani, always respect your opinions.
SunilKumar Dixit
SunilKumarDixit Jul 29, 2022 8:19AM ET
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Oil is about to settle the month bearish, despite $10 recovery from $90 low. Next month may still continue to be exhausting for Oil, given recessionary fears and weak technical formation.
Robert Flores
Robert Flores Jul 29, 2022 8:19AM ET
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Barani Krishnan to add to your comments, I have reason to believe the slowdown in consumptions is mainly driven by anemic summer construction compared to other years - home builders are risk off!
mahir barut
mahir barut Jul 29, 2022 6:41AM ET
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It's very funny to see Americans invent a new kind of definition of recession to denial they are in :) and the press simple accepts this, very interesting
Show previous replies (1)
Barani Krishnan
Barani Krishnan Jul 29, 2022 6:41AM ET
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Mahir Barut: The original definition of recession -- or at least what I've known since my economic school days -- is two straight quarters of negative GDP. It's true that the Biden administration has been trying to spin its own version of this in recent days. But it's wrong to say the press has simply been accepting it. Almost every media copy I've read continues to call this a recession, or one that's technical at least -- albeit with addition of the administration's argument as well (which seriously no one will buy)
SunilKumar Dixit
SunilKumarDixit Jul 29, 2022 6:41AM ET
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They can see it coming and yet pretend with denial.
Barani Krishnan
Barani Krishnan Jul 29, 2022 6:41AM ET
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Tyrone Jackson  Thanks for your feedback. I concur with you on what the administration is doing (my comment to Mahir Barut) but I disagree that the press is lame and doesn't report anything outside of what the White House says. The press was WAY AHEAD of the White House (and even Wall Street, I'll say) in flagging this and, if you read across outlets, you'll find opinions against the administration's spin.
Barani Krishnan
Barani Krishnan Jul 29, 2022 6:41AM ET
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SunilKumar Dixit  It is political, of course.
Robert Flores
Robert Flores Jul 29, 2022 6:41AM ET
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Barani Krishnan if we adjust for inflation, recession started in 2021 !
jason xx
jason xx Jul 29, 2022 5:51AM ET
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Let's see Gold has gone backwards while inflation went from 2% to nearly 10% so no I doubt it is a new dawn
Barani Krishnan
Barani Krishnan Jul 29, 2022 5:51AM ET
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Jason, you have a point, mate.
 
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