Gold bulls stay in control on market diversification, aiming for 2014-2019 resistance line

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  • Bulls in control on diversification.
  • 1340 guards a measured run towards 1357.66 as the 2014-2019 resistance line.

Gold prices broke up out of the bullish descending wedge but met sellers at a familiar resistance around 1338. The correlation between stocks and safe havens continues to play out despite a recent focus back to the Fed and good old fashioned economic data.

Ahead of the FOMC next week, the U.S. calendar is delivering some highly anticipated data, which started today with the Consumer Price Index, (CPI), which continues to give a benign outcome, with a little something for everyone, but on the whole, likely fuels the clamour for interest rate cuts from the Fed down the line, but probably not as soon as next week’s meeting. 

The annual rate of core inflation was at 2%, which is the slowest rate since February 2018. The headline inflation rose 0.1% month-on-month in May, leaving the annual rate of CPI at 1.8% year-on-year, down from 1.9% in April. Core inflation was softer though, undershooting the consensus 0.2% MoM prediction by a tenth of a percentage point. 

The market has already priced a 77% probability of a Fed cut by July. While gold has also been benefiting from a rising chance that the Fed’s next move is a cut, rising appetite for diversifiers due to the ever pending risks of the US imposing further tariffs on Chinese imports along with various other factors simmering away in the melting pot of geopolitical risks. 

We still live in a USD world

Despite the sentiment for the Fed to cut rates, which should be positive for stocks, ultimately, but perhaps shockingly to some, it might not be so damaging for the dollar in the medium term, considering we still live in a dollar world. The weakness in the eurozone and the Pacific should keep the dollar’s contenders at bay. Moreover, the market is already pricing in rate cuts and the dollar is still holding a bullish trajectory, albeit at a discount at these prices.  

However, gold is likely to remain underpinned no matter what. All the while geopolitics remain front and centre as a driving force for markets in the near-term, diversification will be the backbone for gold prices. On the flip side, however, should the Fed sound off the alarms, lower real yields on USD money market instruments will only raise the attractiveness of the zero-yielding yellow metal. 

Nonetheless, should the Fed fail to deliver an uber-dovish message at next week’s meeting, but caution over global economic and political headwinds, any further weakness in U.S. equities could also be the one-way ticket to blue skies that bulls were looking for.  For gold to really lose its appeal, the U.S. and Chinese trade spat will need to be resolved with a mutually beneficial agreement and the global economy will need to show some green shoots from the likes of China and leading European nations as well as the U.S.

For the meanwhile, gold is likely to hold its form above $1,320 support as we head into the Fed from which portfolio managers and CTAs will be looking to position from which will hopefully give markets some fundamental direction again ahead of the G20 where Xi and Trump are scheduled to meet face to face. 

Gold levels

To the downside, 1320 is guarding 1311 and 1303/06 to open 1297. 1297 level meets the 50% Fibo retracement of the late April and early May double-bottom swing lows to recent spike high. The 55-week ma sits at around 1260s and the 200-week ma comes in at 1250s. However, while above the 20-D EMA and prior wedge resistance, 1340 guards a measured run towards 1357.66 as the 2014-2019 resistance line.

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