Gold Going Erratic —How Will It Pan Out?

Gold futures for August are registering weekly losses of 1% due to concerns about possible aggressive rate hikes by central banks. Gold has gone back and forth as it continues to show some erratic behavior.

Going forward, what is the outlook?

Prices

According to analyst Christopher Lewis, the $1,830 level has been acting as a short term resistance. However, if the price breaks above the daily high it will open the door for a rally to the 200-day moving average in the $1,854 level. 

“The alternative to that scenario would be a break below the daily low, in which case we could see a crash to $1,800,” Lewis says. 

“At $1800 we have a psychologically important round number that matches the uptrend line quite well, so I think we will see an interesting fight in that region if we get close.” 

Also, if gold manages to break through that barrier, there might be a price collapse to $1,750, while the precious metal will see erratic movements and very high volatility.

Impact

Lewis asserts that the critical aspect in this market is that investors have to be very careful with the size of their positions because there is a lot of noise and it can cause problems. 

If gold ever manages to break above $1,880 it is possible that the price of gold will go much higher, perhaps to $2,000 in the long run.

“I recommend paying attention to the U.S. dollar because it can decisively influence the dynamics of gold.”

The gold market has faced several headwinds of late, from a strong US dollar to rising interest rates and slowing inflation. And while the US Dollar Index (DXY) is set to post a massive 1.6% monthly loss, the index is still up over 6% this year. A consolidation value is bad for dollar-priced commodities because it makes them more expensive for foreign investors to buy.

The Role of the U.S. Dollar

Right now, gold is receiving downward pressure due to investor concern that the main central banks could apply large increases in interest rates to curb inflation, although at the same time the yellow metal receives some upward momentum due to the fall in U.S. Treasury bond yields, which is associated with concern about the possibility of entering a recession.

“It looks like this uptrend line, the $1800 level, will continue to offer major support. So as long as we stay above there, I think I remain bullish,” Lewis says. 

A bounce from there makes a certain amount of sense, with $1.855 being a barrier due to the 200 day EMA. 

“And then, of course, you have the $1,880 level after that. If we were to break down below this trend line and the 1800 level, then we are likely. In truth, if it weren't for the global recession fears, gold would probably be lower than it already is.”

In this scenario, it seems the factor that is generating the most uncertainty is the U.S. dollar.

Usually, a drop in yields tends to put downward pressure on the demand for the dollar and increase interest in gold. However, this does not happen when investors enter strongly into the American currency, considering it a refuge value in difficult times.