Upside for Gold as rate expectation cooled by recession risk

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Summary

The surge in energy and agricultural commodities in the past 6 months had materialized into serious inflation even down to the consumer end across the globe. To cope with inflation, the Fed has begun to raise rate at an accelerating pace. The rise in the interest rate of the USD causes dysfunction of traditional risk haven such as Japanese Yen USDJPY and Gold GC1!. However, with more evidence that the US is very close to a recession, the Fed might need to tune down to a more cautious approach to balance between taming inflation and speeding up recession due to higher borrowing cost (and debt repayment) for business. The stabilization in rate hike might soften the already strong dollar, hence providing room for traditional risk haven assets to rebound and restore some of their risk haven property. With still ongoing global political uncertainty (see appendix for more detail), there might be further upside potential beyond rebound. One should pay extra attention to the collective transition of power globally which is happening at a similar time coincidentally.

Technical and trade planning

Just like most commodities, the dominant force driving gold downward is the strength of the USD. The US Dollar Index DXY had reached a new high at 107.786, before retracing back to 106.895 to close lower last Friday, creating a reverse hammer candle. While the uptrend of the dollar index is still effective, however the bearish pattern hinted the peak might have reached (or at least the upside momentum is reducing). Similar pattern in reverse was seen in many commodities including gold, which means opportunity for rebound trade.


Note that gold currently is trading below most moving averages which means the downtrend is still in power. 20 days moving average trading below the 50 days, and both pointing downward double confirm the bearish view. In rebound trade it is very important to keep your cut loss and profit taking tight. One should also adopt strategies that allow more tolerance for error (e.g. longing call option with >30-60 days to expiration).

Here are some technical levels trader of gold should be aware of:
Downside support (to cut loss if dropped through)

• 1676.7: 2021-Aug hammer candle bottom
  
• 1721.8: 2021-Sep downside retest bottom
  

Upside resistance (to take profit if fail to go further)

• 1785: May-16 bottom (broke on Jul-5)
  
• 1833: 250 days moving average
  
• 1878.6: Jul-3 rebound peak
  

Appendix: Political events to keep an eye on

Asia

• The former prime minister of Japan, Shinzo Abe was assassinated last Friday. Abe was seen as the de facto power of Japan. He initiated and was involved in lots of Japan economic policy and China-Japan relation issues. Close ties with global leaders, he was one of the early promoters of threat emerging from growing China, which later led to global boycott of China. He also showed his support to Taiwan as he saw the country as the first line of defense of Japan from China. One of his unaccomplished goals was to revise the country’s pacifist constitution to formalize the Japanese self-defense force as army, and broaden its military agenda outside of homeland defense, to be involved in regional security issues, such as Taiwan. The death of Shinzo Abe might help the constitutional revision to gain more supportive votes, which will worsen China-Japan existing tension.
• The 20th National Congress of the Chinese Communist Party will take place in November this year. One of the major topics is whether the current Chinese leader Xi Jinping will be re-elected for the next 5-years term. With lots of policy missteps that have caused material harm to the Chinese economy and financial stability, there are growing voices within the party that they might want a leader who can focus on reviving the Chinese economy instead of political ideals. At the same time, Xi is neutralizing the opposition force by revealing their evidence of misconduct and corruption (same strategy 10 years ago). The upcoming continuation or transition of power in China is going to be a very tricky one.

Europe

• No end in sight for Russian invasion toward Ukraine, albeit increasing military support by the western powers. Inflation continues to make record highs in Europe with latest June CPI figures standing at 8.6%, energy talk with Russia is going to be very difficult especially for natural gas which is virtually impossible to get supply from other continents.
  
• The prime minister of the UK, Boris Johnson had resigned last week amid back-to-back scandals, with the Chris Pincher case became the last straw that broke the camel's back.
  

The United States

• Recession risk, high gasoline price, baby formula shortage, the series of unfortunate events had taken a toll on the president Joe Biden approval rate, which dropped to just 30% in the new national poll. The negative sentiment toward democrats is likely to make the republicans take control of both the senate and the house. The democrats probably can take advantage of the recent Supreme Court’s decision of overturning Roe v. Wade, however the edge might not be enough to change much according to the latest forecast.
  

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ملاحظة

Gold has rise through the first upside resistance level 1785 amid the geo political tension between China and the US on Taiwan issue. However as the trip materialized the risk expectation collapse rapidly. Gold return below the resistance level.

Recommendation is to profit take around 1780-1800 level. Closely monitor the US dollar if strength regain as rate hike narrative might come back closer to next FOMC meeting.

Next good entry to gold would either be:
- Breaking Aug-2 high at 1805 (approximately 50 days moving average)
- Retest 1700-1720 level but fail to drop through (approximately 20 days moving average)