Gold: Odds Of A Breakout Despite Fed, Stimulus Uncertainty

If there ever were a time the haven crowd seemed unsure of what to do, this must be it. And should there be an occasion for gold to rise, despite the odds stacked against it, this might be the time too.

Both gold futures, as well as bullion, rose in a narrow channel in Tuesday’s Asian trading after sliding in the previous session on mixed messaging from COVID-19 vaccine rollouts versus lockdown announcements and the lack of political commitment for a US fiscal aid package ahead of the Federal Reserve’s monthly meeting.

Since tumbling from the mid-$1,900 an ounce perch on Nov. 5, gold futures have largely been confined to a $1,830-$1,850 range. 

After a shocking, near five-month low of $1,767.20 struck three weeks back, a breakout to just shy of $1,880 on Dec. 8 has restored some chart strength to gold futures. Yet the inability to build on last week’s early strength has also brought new risks to the yellow metal.

Gold longs are attempting to push again for higher levels this week, but have faced a wall of technical resistance at $1,845. 

The fundamental story in gold has been as lousy as it can be. Republicans in the Senate and Democrats in the House have been quibbling on different versions of stimulus plans of around $900 billion each—a tiresome saga that has taken nearly 15% off gold prices since the summer. While the arrival of a COVID-19 vaccine from Pfizer (NYSE:PFE)—a historic achievement—combined with new lockdowns has resulted in an incredibly confusing time for investors in most markets.

Chance For Breakout/h2

Even so, gold could attempt another breakout ahead of this week’s Fed meeting as the central bank’s Federal Market Open Committee, or FOMC, seizes one last opportunity to tinker with monetary policy before the year ends.

Interest rate cuts are not part of that policy buffet, as the Fed’s benchmark rate is already anchored near zero.

But on the central bank’s menu will be expanding the $120 billion in bonds purchases a month through quantitative easing, adjusting the maturity of those purchases, or providing the “outcomes-based” guidelines it will need to see before tightening policy from its current historically loose level.

Fed Could Entice Some Moves/h2

The Fed’s game, therefore, will be to undertake policy nuances and nudges rather than bold steps.

With attempts to split the relief package now under discussion in Congress, there could be a chance for real progress this time and a deal before the session ends Friday. 

The bipartisan group that got the stimulus talks going again over the past two weeks has unveiled a $748 billion package that includes new unemployment benefits, small business aid and other programs that received broad bipartisan support.

A Stimulus Bill Could Finally Happen/h2

The second bill includes the two provisions most divisive among lawmakers—liability protections for firms and roughly $160 billion in aid for state and local governments—with the expectation that both could be excluded from a final deal to secure passage of the most popular provisions. This second bill could end up falling out of the final deal if lawmakers don’t rally around it amid broad opposition among Democrats to approving the liability shield.

So, where could gold go in the event of a mini-rally?

Well, short of $1,900, the shiny metal has a shot again for the Dec. 8 peak of $1,879.80. Pushing beyond means it will face itself squarely in the $1,898 bar set on Dec. 16.

Immediately, the range to break and hold above will be the $1,820-$1,850, says Jeffrey Halley, Sydney-based analyst for OANDA in New York. He adds:

“Investors in Asia appear to be hedging against the loss of momentum on equities, the FOMC, and a lack of progress in US stimulus negotiations. The net result is that gold continues to consolidate between $1820 and $1850 an ounce.”

“The FOMC is expected to be dovish, although perhaps not as much as the market had initially hoped for, given the lack of fiscal stimulus negotiations. Any movement by the FOMC, either in action or intent, to cap the rise in longer-term US yields, should be positive for gold prices.”

Mini Rally Could Carry Gold To Just Under $1,900 Or Beyond/h2

If gold has more upside left, then momentum could carry it to just below $1,900 or even slightly beyond, technicals plotted by Investing.com show. 

Gold chartist Sunil Kumar Dixit of SK Dixit Charting sees similar models, explaining:

“Gold has held $1,822 support and bounced to $1,845. Further upside requires clearing $1,852-$1,854 and the next level should be the $1,880 double top on four-hourly charts.”

“An extended buying sentiment can take the metal to $1,898-$1,907. Stochastic Relative Strength Indicator positivity supports the ongoing upside momentum, which is conditioned by holding above $1,822 support, failing which the slide can expose it back toward the $1,800-$1790 zone.”

Investing.com’s own Daily Technical Indicator puts gold at “Neutral”,  with a three-tier Fibonacci resistance first at $1,842.35, then at $1,848.39 and later at $1,858.17.

Should the trend break down, then gold will likely find three-tier Fibonacci support, first at $1,822.79, then at $1,816.97, before full-scale buying emerges at $1,806.97.

The pivot point between these ranges is $1,832.57. 

As with all projections, we urge you to follow the calls but temper them with fundamentals—and moderation—whenever possible.

Disclaimer: Barani Krishnan uses a range of views outside his own to bring diversity to his analysis of any market. He does not own or hold a position in the commodities or securities he writes about.

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Written By: Investing.com