Gold bars in Bundesbank
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Gold starts week above $2,000. What’s next?

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By Naeem Aslam   

Gold started the week on a positive note with the price trading above the critical level of $2,000 widely considered as an important support level.

The question that traders are asking is, why is the price of gold moving higher and if the price will continue to move higher?

The Federal Reserve is on a hawkish monetary policy, and has been increasing the interest rate for over two years now. The main reason for the Fed to hike interest rates from the ultra-low level was mainly due to the super-high inflation rate.

The only option the Fed had was to ease rates, adopt a hawkish monetary policy, and reduce liquidity in the system. This brought interest rates lower, and as per the recent reading, the inflation rate in the US dropped to 3.7% on a year-on-year basis.

For the CPI m/m, the data printed a reading of 0.4% against the previous 0.6%. All of this was really music to many traders’ ears as they began to anticipate that the Fed would not hike rates further from current levels. In fact, some went ahead and began to anticipate some talks about Fed rate cuts.

Going into the FOMC minutes, gold traders had largely priced a less hawkish message from the Fed.

But if we pay attention to the committee minutes, there was very little change from the previous commentary, which disappointed equity traders, where we saw a huge rally since the US inflation reading, which gave some shine to the gold price.

Why is gold price rising?

Smart money knows that they need to read between the lines, and for them, the message was clear, that even though the Fed is not saying it will reduce the interest rate, the data is clearly telling us that it will have to.

The fact that equity markets experienced a sell-off helped the gold price as traders rushed for a safe haven, thinking that the Fed is not in a rush to lower interest rates and hence they need to keep the hedge in place.

Will price move higher?

The most important events for this week are US consumer confidence data on Tuesday, followed by US preliminary GDP q/q number on Wednesday and then we have US Core PCE and unemployment claims numbers on Thursday.

The biggest will be on Friday as Fed Chairman Powell will be speaking at 16:00 BST and these comments will very much sum up the view of the Fed and monetary policy.

If the data this week shows further improvement, the Fed will feel more confident about this policy and there could be some dovish tilt in his commentary.

Having said this, do not expect any thing major in Powell’s speech as the Fed isn’t going to beat the drums of lower interest rates just yet.

So, the dollar index may see some more gas coming out of it as traders will think that if the Fed is not going to be hawkish, there is only one way to go which means to be dovish in the coming speeches. This should help the gold price in the coming days.

From a technical perspective, the 2K price level is of high importance as it continues to serve as a support level and followed by that is 1980.

However, the real meaningful support in terms of a serious sell-off is shown on the chart below, provided by XTB .

As for the resistance levels, they are shown by the red lines on the chart. The first resistance will be at 2049 and break of this will open the door towards the all-time high.

 

Naeem Aslam is Chief Investment Officer at Zaye Capital Markets.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Zaye Capital Markets.