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Optimism over debt ceiling legislation fuels a potential reversal in gold pricing

Commentaries & Views

Over the three-day holiday weekend, President Biden and House Speaker McCarthy reached a deal to raise the debt limit which hit $31.4 trillion In January. The 99-page bill headed over to the House Rules Committee this morning, where the committee will vote to send it over for a full house vote expected on Wednesday.

┬áThe financial markets immediately began to factor this event into asset pricing. The net result was a lower dollar and yields on U.S. debt. The yield on 10-year Treasury Notes dropped to 3.697% after factoring in today’s decline of 10.7 basis points. The dollar is currently fixed at 103.965 after factoring in a decline of 0.16%.

Lower yields and dollar weakness were highly supportive of higher gold prices. After trading to a low of $1931 this morning gold futures recovered and as of 5:15 PM EDT are trading up $14.60 and fixed at $1958.90.

On a technical basis, gold moved and closed back above both a 50% retracement at $1948.30 and the 100-day moving average at $1941.50. The data set used for this retracement begins at $1810 (the low that occurred in February of this year) to $2085. Gold’s 100-day simple moving average is currently fixed at $1939.50. This takes technical support to between $1941 and $1948. The next level of technical support below that is $1915 per ounce based on a 61.8% Fibonacci retracement.

Today’s gains also created a three-day Japanese candlestick pattern indicating the potential for a bullish reversal called a “three river morning star”. According to Investopedia, the “Morning Star” is a bullish candlestick pattern that consists of three candlesticks. The first of which is a large red candlestick located within a defined downtrend while the second is a small-bodied candle (either red or green) that closes below the previous red candle. The final candle is a large green one that opens above the middle candle and closes near the center of the first candle’s body.

The three-river morning star is signaling a possible change in trend from bearish to bullish. Traders use it as an early indication that a downtrend is about to reverse. A morning star pattern can be useful in determining trend changes, particularly when used in conjunction with other technical indicators. Technical indicators strengthening the likelihood that today’s pattern could signal a bullish reversal in gold include prices moving back above the 100-day simple moving average and the 50% retracement level.

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