FX Trading Idea – Gold

Look to buy Gold on dip to $1725 for a movement to $1810. Stop should be placed below $1670

Technical View
From the low of $1434 on 20 March 2020, price of gold has been on a rally to a high of $1747.15. From the 14 April to 12 May, price of gold was consolidating within a Triangle chart pattern. Two days ago, price broke above the down sloping upper trend line of that Triangle. This Triangle breakout is likely to bring price higher to $1810. This target is derived from the Triangle’s chart pattern classical measurement using its widest area at the beginning of its formation.

20EMA on the daily chart is rising and had supported price earlier. This is likely to be supportive of price going forward as well. As long as price stays above the 20EMA, price is likely to progress upwards. Stochastic is rising and has not yet reached the overbought extreme. There is still room for Stochastic to move higher, hinting that price can go higher as well. MACD is rising and bullish. The faster line of the MACD indicator has also turned up from the zero line. MACD is also hinting of further price upsides.

Overall we see price moving higher towards the Triangle chart pattern price target of $1810 in the next couple of months. Only a price decline below $1680 would negate our bullish view.

Fundamental View

Central banks have been cutting interest rate in the wake of the coronavirus pandemic. Some central banks already have negative interest rate before the coronavirus pandemic. The Swiss National Bank, Bank of Japan and the European Central Bank currently have negative interest rate. Many central banks have interest rate that is less than 0.5%. These include the Federal Reserve, the Reserve Bank of Australia, Reserve Bank of New Zealand, just to name a few. Many of these countries have inflation higher than zero. Those countries where inflation is higher than interest rate are simply losing value and Gold is one way to protect that value. Gold is a hedge against inflation.

Many countries are facing a recession in the wake of the coronavirus pandemic. Gold is also a hedge against recession and holding on to gold will have strong appeal. In the Great Financial Crisis, Gold was able to increase its value. In fact even after the recession, Gold continued to rally till its high of 1920 in 2011.  

As a result of coronavirus impact, many countries are embarking on monetary and fiscal policy to kick start their economies. Many central banks, including the Federal Reserve, are embarking on large scale quantitative easing (QE) programmes. The Federal Reserve is embarking on another QE program which is likely to undermine the value of the US dollar. QE devalues a currency and with money losing its value, many are turning to Gold as a store of value in this time of need.

A souring of U.S.-China relationship, as a result of the coronavirus as well as the Huawei issue is also likely to drive up demand for gold. Uncertainty over a U.S-China phase one trade deal reached in January 2020 and to be implemented soon is likely to increase the demand for gold.

Leave a Reply

This site uses Akismet to reduce spam. Learn how your comment data is processed.