Gold is attempting to make a comeback ahead of the anticipated Powell’s Jackson Hole speech. Silver is working as an igniter, just like the last two rallies earlier this year. However, each new rally attempt has become weaker than the previous one, although their speed seems to be quicker. Silver’s latest surge from near 22 to over 24 fueled gold to jump from 1885 to near 1920 resistance. Today could be a gamechanger for the short term, or maybe even for the medium-term moves.
Powell is expected to reiterate data dependency and repeat that rates will stay higher for some time. Today’s key point could mark the peak of the rate hike cycle. Powell might want to hold the door open for more hikes if necessary, but how long the much the door stays open could determine today’s outcome.
Federal Reserve members appear to be differing from each other on the topic of rate peak. Some of them still do not see inflation heading for the 2% target. The base effect change of the CPI, possible incoming food inflation, and the persistently strong labor market could prevent inflation from dropping much lower. On the other hand, economic activity seems to be slowing down, including the labor market, despite remaining very strong relative to historical averages. Members will want to look for incoming data to chart a path to a soft landing. Today’s speech could reveal where the FED is leaning ahead of the key September meeting.
In addition to the highly anticipated Powell speech, Lagarde will also be speaking. Following numerous negative surprises, the latest PMI data is also a warning for Euro bulls. If Lagarde shifts her tone to be more dovish after the data, EURUSD could trend lower. However, the impact on gold prices from this shift is a bit unclear. A dovish ECB is generally positive for gold, but a significant drop in EURUSD could trigger a dollar index – gold negative correlation for many algorithms, causing gold to potentially follow the movement of EURUSD in either direction.
Gold could be seen as overvalued according to the bond market and inflation expectations. Long-term real rates (10 years) are just shy of 2%. The last time the real rate was this high, the gold price was below $1000. Of course, the rising government debt and gold demand from countries like China and India have a real positive effect. However, gold stayed remarkably strong during the big bond sell-off and falling long-term inflation expectations.
From a technical standpoint, gold might finally be preparing for a correction after appearing overvalued from a fundamental standpoint. The upward trend since November has been broken. The trend line and the upper line of the recent downtrend channel are converging near the 1950-1960 zone. This could serve as the main resistance in the short term. As long as gold remains below this zone in daily closes, any upward movement could create selling opportunities. Earlier resistance levels to watch are at 1920 and 1937. Gold bulls should await a significant breakthrough to surpass the 1950-1960 zone.
For downward movements, potential support levels include 1900 and the Fibonacci 38.2% level at 1892. However, the primary support to monitor would be the 233-day moving average, currently situated at 1877. A breach of this moving average might lead gold to 1840 and potentially even below 1800, depending on incoming data and momentum.
As a final note, gold traders should closely monitor silver in the coming weeks, as it could continue to act as an igniter for both upward and downward movements.
