Good Old Gold Is Back on the Radar!
Gold has always been symbolic storage of value as it tends to appreciate against the fiat currencies, the supply of which the central banks worldwide consistently increase, primarily due to the current pandemic.
The periods of economic downturns tend to benefit Gold, as investors flock to the precious metal in uncertainty fears. Regulators print more money, benefiting the Gold price. COVID-19 has been the case for quantitative easing, as most governments employ monetary stimulus to help their economies to get through the pandemic.
For major economies, the stimulus bills' size has already far exceeded the one issued during the 2008 global financial crisis. For instance, in Japan's case, the size of the stimulus is 21% of GDP, compared to 2.2%, which the government issued in response to the 2008 financial crisis (according to McKinsey's research).
As the money supply increases, there may be more concerns about inflation, which is bullish for Gold.
The analysts from the leading banks such as Citibank, ANZ, HSBC, and Goldman Sachs have a bullish outlook on Gold for several years based on the fundamental and technical picture.
Buying gold – technically speaking
For those position traders sitting on the sidelines, now might be a good time to consider going long. Let's look at the monthly chart of XAU/USD below.
After the market made a new all-time high in the middle of 2020, breaking the major resistance at 1800, the price returned to the resistance-turned-support 1800 and tested it since then. When the market pulled back to 1800 for the first time, it formed the engulfing pattern (two candles in a circle) – a strong rebound signal.
As you see, Gold didn't proceed to grow after the pattern was formed; however, the pattern hasn't been violated either. The difference now is that the market is closer to the pattern's invalidation point, which is below 1800 (red horizontal line). It means that if you decided to buy now, the distance to your potential Stop Loss would be shorter. Thus you can risk less and still keep your protective stop in the objective spot. Your minimum target should be the all-time high right below 2100, with the approximate risk-to-reward ratio of 1.5.
If you look at the price action from the correction perspective, you would be buying right around the middle of the downward channel while trading off the 1800 support level (see the Weekly chart below).
What could be the catalyst of the gold trend continuation?
On Friday, at the US opening, the Bureau of Labor Statistics released the Employment data, indicating Non-Farm Employment Change of 49K (-227K prev.) and the Unemployment rate of 6.3% (prev. 6.7%). Although the data seems positive, the gold market reacted with the sharp spike in price. Look at the intraday chart above.
Not long before the US opening, the market managed to break the intraday trendline confidently. Still, it was drawn back by traders' reaction to the US economic data release with the proceeding growth.
The bullish sentiment may remain in place until the next major economic release, providing a nice launch for long positions.
Gold is an excellent asset to have due to fundamental and technical reasons. Traders can take advantage of the low prices compared to the Engulfing pattern formed on the Monthly time frame. The market perceived the US data release as bullish for Gold, providing the right sentiment environment to develop a long position.