Introduction
Gold prices surged strongly to start this week, with spot gold advancing 2% to US$4,080.09, its highest position since October 27. This comes on the backs of a combination of poorer than expected U.S. economic data and increasing optimism about a coming Federal Reserve rate cut in November. The U.S. dollar index retreated 0.1%, making gold even more enticing on international markets. Treasury yields have fallen due to safe-haven demands. Traders see this gold price increase is a manifestation of macro fragility but overall fiscal optimism — optimism that this current U.S. government shutdown will be over soon — although traders must not read too much into this current gold market momentum. Already, much of it seems to have been factored in, and it now remains to be seen if gold can truly break through this current logjam or if it will hit a brief macro-halt.
Main Factors That Influence Golde Prices
The increase in gold prices this week is due to macroeconomic weakness, policy uncertainty, and shifts in monetary easing policy. Data released last week showed job cuts in both government and retail segments, with a decrease in consumer confidence to the weakest levels in nearly three and a half years. The 40-day government shut down has exacerbated these problems by postponing critical economic data releases, which have dented economic growth. Recent statements by President Trump that a shut down deal is "very close" have boosted short-term confidence, although market participants harbor doubts over long-term economic woes.
Additionally, markets are now incorporating a 65% chance of a Fed rate cut in December due to increasing pressure on policymakers to compensate for the economic effect caused by the government shutdown. Lower interest rates are generally bearish for the US dollar and lower the cost of holding gold, thus providing ideal conditions for gold to appreciate. On the other hand, gold's safe-haven appeal is sustained by various sources of anxiety, including tariffs and trade negotiations, as well as tension in the Middle East. However, traders must be careful because, following the reopening of government, a round of profit-taking might be used for gold's recent advance if risk assets experience a resurgence due to improved fiscal policy.
Technical Analysis
Technically, gold is looking positive in the long term but in the short run we are likely to face challenges. Gold price needs to break above its important resistance level of 4,300 with heavy buying momentum to continue its momentum to the upside. The positive aspect from the long term perspective is that he price hasn’t violated the 50-day SMA on the daily time frame which very much confirms that the current correction is a healthy one.
Having said this, if the price fails to maintain the current upside, we are likely to see the price falling back again and more than likely to test the 50-day simple moving average on the daily time frame if not breaking below it. If the price breaks below this SMA, we could see the price moving towards the important support level shown on the chart below.
The RSI of the gold price on the daily time frame shows that the shining metal is no longer overbought but it is certainly no way close enough to be classified as oversold.
Gold price chart: XTB
Conclusion
Gold's advance is resting on a tempting yet delicate supporting stratum: low U.S. economic data, calls for interest-rate cuts, and safe-haven purchases due to political turmoil. However, with escalating hopes for a government reopening, traders face a challenge: to keep hopes in check. An agreement on fiscal matters might curb sideways purchases driven by fear, and with most hopes for improvement already being priced in, there is a growing likelihood of a correction. However, the overall macro-economic framework for gold, including growth slowdown, a weakening greenback, and unclear policies, is still intact.
Most traders would find it hard to argue that without a sharp change in market tone and a resurgence in risk appetite, gold will be pegged firmly above US$4,000 for now with any immediate burst above $4,150 hard to discern. Indeed, traders would do well to be agile in this event, with opening last night perhaps mere fuel for short-term turmoil but ultimately no change to the underlying story: gold's rise is about much more than relief that politics is progressing.