Gold Price Bearish Build-Up Signals a Drop to $1,767 is Possible
- The gold price has been wavering recently partly because of cryptocurrencies.
- Focus shifts to the first Fed interest rate decision of the year.
- The technical chart shows that a bearish breakout is possible.
The gold price has stumbled in the past few months. After reaching an all-time high of $2,075 in August, the precious metal has dropped by more than 10% and is currently trading at $1,850. On Tuesday, the price declined by another 0.30% ahead of the Federal Reserve interest rate decision.
Why gold has lagged
There are several reasons that explain why the price of gold has declined in the past few months. The most notable one is that interest in gold among investors has waned considerably because of the demand for cryptocurrencies.
In total, gold ETFs experienced record outflows in the final two of the months as investors rushed to cryptocurrencies like Bitcoin. That happened since digital currencies were generally doing substantially better than other traditional assets, like precious metals and stocks.
Meanwhile, the gold price lagged because of the overall lack of inflation. To many investors, gold is often a hedge against inflation. Therefore, with the American inflation staying below 1% in 2020, many people saw no incentive to invest in the metal.
Most importantly, gold lagged because of the overall optimism about a coronavirus vaccine. The vaccine pushed more people to shift away from gold. That’s because the role of gold as a hedge against risk disappeared.
Gold wavers ahead of the FOMC decision
On Tuesday, the price of gold is wavering ahead of the first interest rate decision of the year that came out on Wednesday. The bank will mostly leave interest rates unchanged as other central banks like the ECB, BOE, and BOJ did last week. However, its language and the accompanying monetary statement will paint a clear picture of what to expect in the coming months.
In the past Fed decisions, the committee reiterated that rates would remain low for at least three years. They also said that they would continue their quantitative easing policies to support the economy.
However, in the past few weeks, some Fed members have changed their tone. Some like Raphael Bostic have started to provide hints that the policy will change earlier than expected. They have cited the incoming stimulus by the Biden administration and the rising inflation.
Indeed, recent economic data showed that the consumer price index rose by 1.4% in December while the core CPI rose by 1.6%. Therefore, many economists believe that inflation will reach 2% by the end of the year. That could push the Fed to hike rates sooner.
Higher interest rates tend to have a mixed effect on gold prices. In theory, with high rates, more people and investors would shift their resources to yielding assets like bonds. They would also lead to a stronger dollar. And gold and the US dollar have an inverse relationship.
Gold price is also wavering as risks to Biden’s stimulus package emerge. A set of bipartisan members of the Senate have vowed to oppose the package as it is. They are advocating that the stimulus checks should be sent only to needy individuals.
Gold price technical outlook
The daily chart shows that the gold price has been under intense pressure in the past few months. Its attempts to retest the all-time high have found strong resistance around the $1,965 level. If you look at the longer-term chart, you will see that this is just the confirmation of the cup and handle pattern.
On the daily chart, the price is slightly above the second support level of the Andrews Pitchfork tool. A closer look shows that there is a bearish build-up forming. Therefore, while the long-term trend is bullish, there is a possibility of more weakness to come. If this happens, the next key support level to watch is $1,767.