Gold analysis: Is the worst behind us?

28 jul 2022

Gold prices reacted positively to the Federal Reserve's decision not to raise interest rates by a full percentage point in July.

First and foremost, the reduction in expectations of future rate hikes due to concerns about a recession in early 2023 drove gold above $1,740 per troy ounce. The expectations of lower rates in 2023 also weakened the US dollar, as evidenced by the DXY index falling to the 106 mark, as of this writing.

Is the worst for gold now behind us?

Even though fears about rates are less than they were a few weeks ago, there is still no sign that the Federal Reserve is taking a more dovish stance.

However, gold may begin to decouple from its negative relationship with interest rates and see strong investment demand if economic actors start to factor in that inflation will be difficult to control even with higher interest rates.

The event of a de-anchoring in inflation expectations, which historically happened when inflation exceeded the double digit mark, will provide a strong support for gold as inflation hedge.

Gold technical analysis

Technically, the downward channel is still in place, but gold's price momentum is picking up as the RSI is getting close to the important 50 threshold, which it hasn't seen since mid-June.

The MACD offered a bullish crossover this week, supporting the thesis of a likely short-term trend rebound.

Gold is attempting to test the $1,750 resistance level, which if broken could open the door for a $1,786-1,790 resistance test. Beyond this point, the psychological level of $1,800—which corresponds with the upper line of the descending channel—becomes crucial for a trend reversal confirmation.

On the downside, $1,710 continues to offer strong short-term support, and year-to-date lows of $1,680 appear more difficult to retest if the Fed doesn't unexpectedly make extremely hawkish comments before the September meeting.