Gold’s recent sharp rebound gains pushed technical indicators towards strong overbought levels.
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As we mentioned in recent technical analysis, the gold market is still receiving strong, positive momentum from the increasing geopolitical tensions in the oil-rich Middle East region, which represent a threat to a third of the world’s oil production, which increases pressure on the global economy. Considering this environment, the price of gold (XAU/USD) moved higher with gains that extended towards the resistance level of $1932 per ounce, the highest in nearly a month.
On the other hand, US stock indices on Wall Street came under pressure after the recent indication that the US economy is still strong, although it may be too strong to satisfy the Federal Reserve. According to trading, the S&P 500 index was oscillating between small gains and losses in afternoon trading after erasing the early decline. The Dow Jones Industrial Average went from a morning loss of about 130 points to a profit of 163 points, then returned down by 30 points. The Nasdaq Composite Index fell by 0.3%.
Generally, financial markets have witnessed turmoil in recent weeks due to concerns about the war in the Middle East and its potential impact on oil prices. But those concerns have subsided a bit to refocus on what typically drives stock market movements over the long term: where interest rates, the economy and corporate profits are headed.
On the economic side, a report Tuesday morning showed that shoppers spent more at U.S. retailers last month than economists had expected. This is a sign of a healthy economy and is likely the result of a still strong Labor market, which should help support corporate profits. But a strong economy may provide inflation with more momentum and prompt the Federal Reserve to keep US interest rates high to stifle inflation. Such a move would hurt stock prices and other investments at the same time. However, the Fed is trying to strike a delicate balance where it slows the economy enough to bring down high inflation but not so much that it causes a painful recession.
Furthermore, Treasury yields rose in the bond market after the report was issued. The yield on the 10-year Treasury note rose to 4.85% from 4.69% late Monday. Lower oil prices helped ease some pressure on concerns about inflation. The sharp jump since the summer in the yield on 10-year bonds has affected the stock market, as traders increasingly accept the Federal Reserve’s expectations that it is likely to keep US interest rates high for an extended period. The central bank has already pulled its key interest rate to the highest level since 2001 and is discussing whether to increase it again.
According to the performance on the daily chart below, the price of gold is breaking the last resistance, increasing expectations for a return to the psychological resistance of $2000 per ounce again. Gold’s recent sharp rebound gains pushed technical indicators towards strong overbought levels.
- On the other hand, the price of gold will not give up its gains without calming the situation in the Middle East, the current strong focus of investors and markets.
- Moving towards the support levels of $1900 and $1885 is the most important for the bears to regain control over the trend.
- The gold market will also react to a round of statements by US Central Bank policy officials this week, led by Bank Governor Jerome Powell.
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