Gold Price Forecast: Breaks down out of rising channel, charts turn bearish

Gold price has broken out of the base of the rising channel it has been climbing inside since the March 8 lows. The precious metal trades at around the $1,950 mark at the time of writing, and is declining rapidly. The breakout lower brings into question the continuity of the established uptrend on the short-term timeframe, though Gold price remains in an uptrend over the medium-term.  

Gold news: Safe-haven flows ease on banking rescue

From a fundamental perspective the safe haven flows that pushed Gold price to new year-to-date high have dried up as the latest casualty of the current neo-financial crisis, Credit Suisse, gets taken over by rival UBS on Monday, settling market fears for now. 

In the United States, treasury staff are 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 provides further evidence to reassure investors that authorities are willing to provide a backstop.

US Treasury yields on the rise prior to FOMC

One factor that may be weighing on the Gold price is a rise in the benchmark 10-year US Treasury bond yield, which reached 3.58% at the time of writing, up from lows of 3.30% during the crisis on Monday. Gold tends to fall when yields rise as they indicate rising interest rates and therfore a higher opportunity cost for holding non-yielding Gold, compared to staying in cash.

From a technical perspective the chart of the 10-year Treasury yield is also showing 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 quite rare and often denote a reversal of trend, 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 Gold, yields 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 drive up yields and the US Dollar but push down the Gold price – no cut at all will have the opposite effect.

Making the decision a little more complicated this time, however, is the recent banking crisis which was triggered in part by rising interest rates. Whilst the Fed wants to battle inflation, it must now also take into consideration the impact of higher interest rates on financial stability.

Yohay Elam, Product Manager, Premium Offering at FXStreet, expects the Fed to map a hawkish course, at least intiially, prioritising price stability over financial stability.

"'Nothing to see here, move along' – that is how I expect the Federal Reserve to act in the wake of the banking crisis, raising rates to fight inflation as if the world hasn't changed." Says Elam in a preview of the meeting.

He notes the sudden ballooning of the Fed's balance sheet over recent weeks since the banking crisis began and it stepped in to provide emergency liquidity to the US banking sector. This he argues is evidence that 'easing by other means' is ocurring, and suggests the Fed will feel justified in continuing with its aggresive rate hiking agenda. 

Yet, he thinks Chariman Powell will temper the hawkish decision with a more nuanced press confernece speech, that will mean little if any net upside for Treasury yields or the US Dollar overall.

"The short version of my scenario is: risk-off on the rate hike and the dot plot, followed by an immediate and slight recovery in response to the statement. Then, Powell would further boost the risk-on mood with promises to react to the situation and with caring words about the labor market." Says Elam. 

Gold price technical analysis: Pullback reaches channel line

From a technical perspective Gold price has broken out of the base of the rising channel which began at March 8 lows. It is now in freefall and is bringing into doubt the validity of the short-term uptrend. 

Gold price will probably contune declining until it hits an eventual target at around $1,920, calcualted by taking the width of the channel and extrapolating it lower. This also happens to be near the level of the 50-4hr Simple Moving Average (SMA), a level that is likely to provide a safety net for falling price.

The Relative Strength Index (RSI) is corroborating the bearish downturn in price action as it is falling in line with price. On the daily chart of Gold price, the RSI is in the process of exiting the overbought region above 70, adding confirmation to the bearishness of the channel breakout, and providing a signal to go short. 

Gold price: 4-hour Chart