Gold Update: The Breakdown

It’s all about persisting inflation at the end of the day. All markets watch how the Fed tries to fight it as aftershocks of rate decisions are observed in bonds, stock market, foreign exchange, precious metals and even crypto.

US Inflation vs Fed Rate vs Real IR

Source: TradingView

The graph above visualizes that “fight of the night”. Indeed, we witness some progress of the Fed’s efforts in the falling U.S. inflation (red line) numbers from the peak of 9.1% in the summer down to the latest data of September at 8.2%, which was still above the expected 8.1%.

The 3% increase of the Fed rate (blue line) brought inflation down only by 0.9%. It is way too slow, as the inflation target of 2% is still way too far, hence the Fed could keep their aggressive tightening mode.

Surely, there is a time lag between the Fed action and the inflation reaction. However, the time is ticking away as inflation is like a fire - the earlier it's extinguished the better.

The real interest rate (black line, down pane) crossed over the August top above the -5.1%. The next resistance is at -3.7% (valley of 2011) and it is highly likely to be hit soon as it is only 1.2% away. The valley of 2017 in -2% is almost 3% away, which means a huge Fed rate hike or a big drop of inflation. We can’t rule it out anyway.

Where do you see the yearly U.S. inflation by the end of the year?

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Indeed, these interest rate projections above could make precious metals life tough. Let's check the gold futures chart below.

Gold Futures Weekly

Source: TradingView

The gold futures price has lost ground last month as it has dived below the July growth point of $1,678. It was a double support as the price also breached the black dashed long-term trendline. We can see the textbook price action there – breakdown, retest of broken support and resumption of collapse.

The yield of 10-year U.S. Treasury bonds (red line) skyrocketed to 4%, extending the divergence with the gold price hugely. This amplifies the bearish potential for the gold price massively.

I added the US M2 money supply indicator (green line) to show you that it is flat and it offers a cap for the gold price. It suppresses the bullish potential for the metal as the “printing press” has stopped.

The Volume profile indicator (orange) shows that the price is in the volume gap as there is no support until it drops to $1,500. Beware of it, as it is not as thick as the above resistance area at $1,800 and the next support zone at $1,300.

The RSI is in bearish mode as it didn’t even touch the waterline during the price retest of the broken support.

Last time the majority of readers chose the only bullish option that the price would hold the ground of $1,678. This is that rare case when your main bet did not play out.

The next support of $1,500 was the second choice. In terms of Volume profile indicator, the $1,300 support is larger than the $1,500. However, the $1,300 option has been skipped in favor of really “die-hard” support of $1,000. It means that readers consider $1,500 as a “fly or die” option.

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What is your outlook for the gold futures price now?

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Intelligent trades!

Aibek Burabayev Contributor

Disclosure: This contributor has no positions in any stocks mentioned in this article. This article is the opinion of the contributor themselves. The above is a matter of opinion provided for general information purposes only and is not intended as investment advice. This contributor is not receiving compensation (other than from for their opinion.

2 thoughts on “Gold Update: The Breakdown

  1. I'm not sure what the cost of producing an ounce of gold is, but I'm sure it's over $1000and I suspect with what inflation we see and will continue to see, that if it is not now, it will soon be over $1300, so I'm remaining bullish.
    Another reason is timing. I'm looking at an unsustainable spike in the us dollar and when it gives it will be hard and fast and I don't want to miss the boat. I also never stop thinking about what's happening to the debt in the face of these rising interest rates. One thing about playing kick the can; eventually the can winds up someplace it cannot be kicked from, or something comes along and rolls over it.

    1. Dear Frank,

      Really appreciate your comment as you share valuable thoughts.
      You hit it right with the cost price of gold as it was indeed over $1k at $1,181 in 1Q 2022
      according to S&P Global Commodity Insights analysis of 17 large gold producers.

      Be careful guessing top for the Dollar Index
      as it can skyrocket on interest rate hikes beyond next target of $121.
      Previously, my history-based calculations have given double-digit Fed rate.

      Good luck,

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