Gold Price Breakout Triggers Overbought RSI Reading


Gold Price Talking Points

The recent breakout in the price of gold appears to be gathering pace as Federal Reserve officials respond to the shift in U.S. trade policy, and the precious metal may continue to gain ground over the coming days as the Relative Strength Index (RSI) flirts with overbought territory.

Gold Price Breakout Triggers Overbought RSI Reading

Gold extends the rally from late last week as the Trump administration plans to impose a 5% tariff on all goods coming from Mexico, and the precious metal may continue to benefit from the current environment as the weakening outlook for global growth puts pressure on the Federal Open Market Committee (FOMC) to alter the forward guidance for monetary policy.

Recent comments from St. Louis Fed President James Bullard, a 2019-voting member on the FOMC, suggest the central bank will change its tune over the coming months as the committee “faces an economy that is expected to grow more slowly going forward, with some risk that the slowdown could be sharper than expected due to ongoing global trade regime uncertainty.”

As a result, Mr. Bullard insists that “a downward policy rate adjustment may be warranted soon to help re-center inflation and inflation expectations,” and the central bank may show a greater willingness to switch gears later this year especially as Fed Fund futures reflect a greater than 90% probability for a December rate-cut.

Image of federal reserve interest rate forecast

With that said, it remains to be seen if Chairman Jerome Powell & Co. will continue to forecast a longer-run interest rate of 2.50% to 2.75% as the U.S. economy shows little to no signs of an imminent recession, but the fresh updates to the Summary of Economic Projections (SEP) may heighten the appeal of gold if Fed officials highlight a lower trajectory for the benchmark interest.

In turn, the shift in U.S. trade policy may continue to drag on risk-taking behavior, and the flight to safety may keep gold prices afloat ahead of the Fed meeting on June 19 as the precious metal negates the head-and-shoulders formation from earlier this year.

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Gold Price Daily Chart

Image of gold daily chart

  • The broader outlook for gold is no longer mired by a head-and-shoulders formation as both price and the Relative Strength Index (RSI) break out of the bearish trends from earlier this year.
  • The recent string of higher highs and lows keeps the topside targets on the radar as the price of gold clears the Fibonacci overlap around $1315 (23.6% retracement) to $1316 (38.2% expansion), with a break/close above the $1328 (50% expansion) to $1329 (50% expansion) region raising the risk for a move towards $1340 (61.8% expansion).
  • Recent developments in the RSI suggest the bullish momentum is gathering pace as it flirts with overbought territory, but the indicator may flash a textbook sell-signal over the coming days should the oscillator cross below 70.

For more in-depth analysis, check out the 2Q 2019 Forecast for Gold

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– Written by David Song, Currency Strategist

Follow me on Twitter at @DavidJSong.

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