Gold price pulls back from its yearly high as global banking jitters pass (for now) and US Treasury yields find a floor, supporting a stronger US Dollar. The precious metal trades at $1,966 at the time of writing as it consolidates within a technical uptrend.
Gold News: Safe-Haven Flows Ease On Banking Rescue
The dust settles after the latest casualty of the current neo-financial crisis. Rival UBS swallowed up Credit Suisse on Monday, and Gold – the safe-haven par excellence – lost the upside momentum that propelled it to YTD highs above $2,000.
In the United States, treasury staff is looking at ways for regulators to insure more than the current Federal Deposit Insurance Cap (FDIC) of $250,000 for bank deposits to increase confidence in the banking system, according to a report by Bloomberg News on Monday.
This adds to all the support already provided by authorities, estimated at half the cost of the 2008 financial crisis bailout, and offers further evidence to reassure investors that leaders are willing to save the day.
US Dollar Rallies Before FOMC
The US Dollar is rising, reflected in the 0.20% gain seen in the US Dollar Index on the day, which tracks the world’s reserve currency against a basket of counterparts. Since Gold is priced in US Dollars, it tends to have an inverse relationship – when the Dollar strengthens, it takes less of them to buy the same quantity of Gold, all other things being equal.
Treasury yields, which are also up, are highly correlated to the US Dollar, rising from a nadir of 3.30% on Monday during the depths of the turmoil to 3.54% at the time of writing – for the benchmark 10-year US Treasury bond.
Gold tends to fall when yields rise as they indicate rising interest rates and, therefore, a higher opportunity cost for investing in Gold, which is non-yielding.
From a technical perspective, the chart of the 10-year Treasury yield also shows a long pin-like hammer candlestick formed yesterday, which looks very much like it is marking the end of the trend down that started as the March 2 highs rolled over. These sorts of candlesticks are rare and often denote a reversal of direction, and if that is the case this time, it could signal the start of a short-term uptrend for yields.
The next big event for both Gold and the US Dollar is the FOMC meeting on Wednesday, March 22, at 18:00 GMT, at which the US Federal Reserve will make its next monetary policy decision. The odds currently favor a more-modest-than-was-previously-expected 0.25% increase in interest rates.
If the Fed decides to go big with a 0.50% rate hike, however, it will boost the Dollar and push down the Gold price – no cut at all will have the opposite effect.
However, the recent banking crisis triggered in part by rising interest rates is making the decision a little more complicated this time. While the Fed wants to battle inflation, it must now also consider the impact of higher interest rates on financial stability.
Gold Price Technical Analysis: Pullback Within An Uptrend
From a technical perspective, the Gold price remains in an uptrend both in the short and medium timeframe. It ascended in a steep channel but now appears to pull back down after peaking on Monday.
The Average Directional Indicator (ADX) on the 4-hour chart is 55, a very high reading. ADX measures how strongly an asset’s price is trending; when it reaches above 50, it is often a sign the trend is close to exhaustion. Given the high reading was accompanied by a two-bar reversal pattern from Monday’s highs and a steady decay, it may be a sign Gold price could pull back further, probably to the base of the channel in the $1,960 region.
The trend is bullish, however, suggesting that it will probably continue rising once it has finished its correction. It could require a decisive break and close below the lower channel line to indicate a deeper correction or reversal of the uptrend was taking place.