Weekly Macro Outlook

Gold Rally Points Toward Long-Term Reversal

Over the last few weeks, the financial news media has been relatively quiet with little in the way of market-moving developments seen gaining attention.  But one exception to this has been the massive rally in gold prices, which suggests that we are seeing a major shift in the underlying fundamentals.  There are a few different reasons for why this has occurred, and many of them deal with the fact that the majority of the market is looking for safe haven alternatives in a somewhat uncertain environment of stability.  

But while some might think that these moves are likely to impact nothing more than precious metals (or even the commodities space as a whole), the reality is that these type of moves tend to influence all aspects of the financial markets.  And the forex space is at the center of most of these considerations.

Chart View:  XAU/USD

Source:  Atlanta Gold and Coin

Market traders that look to base their decisions on trend continuations and reversals will likely see some interesting developments in the chart shown above.  Specifically, this means that the long term downtrend in gold (relative to the US Dollar) has now broken out of its downtrend line resistance en route to the 1200 mark.  

These are levels that have not been seen since last summer, and since this was a time when the monetary policy outlook around the world was very different the strength of these moves is becoming difficult to ignore.  The fact that gold markets have rebounded so forcefully indicates that prices had fallen too far and for too long and now contrarian traders are looking for an opportunity to capitalize on the weakness.

Looking Ahead

Going forward, markets are likely to place more and more focus on psychological levels in the price of gold relative to the US Dollar.  Stock market activity has been largely stagnant in the early parts of this year, so investors are looking for reasons to get excited about peripheral assets.  This means that any further rallies from here will attract more attention (and likely buying activity) from the investment markets as a whole.  

Of course, gold is priced in Dollars, so if we do start to see these types of rallies it will likely start to weigh more heavily on the greenback.  The Federal Reserve has done little to indicate a specific timeline for when we will actually see the next interest rate increase from the central bank, so the implications here are vast -- and this applies to traders in both forex and in the commodities space.