Market analysis

Fundamental vs technical analysis: spotlight on gold

By Paul Reid

20 February 2024

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Some traders check the news first while others go straight to the charts. In this article, experts in fundamental analysis and technical analysis go head to head on the future of gold prices.

Technical perspective - medium-term market overview

Li Xing Gan, CMT, CFTe - Financial Markets Strategist

Gold’s crossroads

With gold prices experiencing a downward trend due to a stronger dollar fueled by robust US economic data, the question arises: will this weakness persist, or can we anticipate a rebound? 

While technical analysis suggests a long-term bullish trend, fundamental factors, particularly disinflation trends, require more conviction. Let's explore gold's chart to better understand its movements.

Gold Chart: Weekly timeframe

Potential breakouts and resistance levels

Gold is in a bullish trend on the weekly timeframe, marked by higher highs and lows within an ascending channel. However, resistance at $2120 (USD) has proven formidable, having stalled the price rally multiple times in 2022 and 2023. Resistance at $2120 is pivotal, with a breakout signaling further upward movement toward the 2250 (USD) resistance zone.

Potential reversals and support levels

Despite the bullish outlook, caution is warranted due to potential pullbacks. As prices approach the $1950 support zone, which aligns with the 61.8% Fibonacci retracement and the lower boundary of the ascending channel, a potential rebound may occur. A short-term retracement may provide strategic entry points along the broader bullish trend.

Monitoring lower time frames for a shift in market structure, indicated by consecutive higher lows and higher highs, alongside bullish candlestick patterns such as the three white soldiers or the morning star, could confirm the bullish momentum. However, a breakout below could challenge the bullish sentiment, with $1820 as the next support.

Technical summary

While technical analysis suggests a bullish long-term outlook, fundamental factors lack conviction. A breakout above the $2120 resistance may trigger a rally towards $2250, while a pullback to the $1950 support presents strategic entry opportunities, supported by the lower channel boundary and Fibonacci retracement. Yet, a breach below the $1950 support could alter the bullish landscape.

Fundamental perspective - medium-term market overview

Inki Cho - Financial Markets Strategist

Shining gold is a thing of the past

At the end of 2023, gold reached $2,088 per ounce, primarily due to the consistent decline in inflation, which led to expectations of a full-fledged rate cut by the Fed. The market sentiment, reflecting that the Fed will lower its interest rates around March, has enhanced the attractiveness of gold as an investment option. Furthermore, escalating geopolitical tensions in the Middle East have also spotlighted gold's role as a haven asset.

The recent remarks made by Fed Chairman Powell during the recent FOMC, which were more hawkish than anticipated, followed by the subsequent comments made by the Fed officials, have resulted in a sense of disappointment over the rate cut. Furthermore, the probability of the Fed's March FOMC rate cut has dropped significantly from 76.9% a month ago to just 8.5%. The 10-year yield has climbed to the 4.30% level, and the dollar has continued to test the 105.0 threshold, further compounding the decline in gold.

Dynamics between the Fed and CPI

At this juncture, it is imperative to give careful consideration to the Fed's monetary policy stance in the future, and the future stance of the Fed will be impacted by the forthcoming US employment and inflation indicators.

In that respect, the recently published U.S. Consumer Price Index(CPI) for January has raised apprehensions in the market about the Fed's monetary policy remaining restrictive in the future.

The headline CPI for January has shown a rise of 0.3% from the previous month. This figure has surpassed the market expectations of 0.2% and last month's figure of 0.2%. Furthermore, the core CPI, which excludes energy and food prices, has risen by 0.4% from the previous month, exceeding the market consensus of 0.3%. The current data indicates a resurgence of inflation, which was a number one concern for the Fed.

During the latest FOMC meeting, Jerome Powell, the Chairman, emphasized that the potential risks of inflation being fixed at a level exceeding 2% are more significant than the dangers of accelerating inflation. The recently published CPI data indicates the emergence of such signs.

Key considerations for gold investors to bear in mind

In light of the latest CPI release, gold prices moved south, experiencing a decline to $1,990.0. This downturn can be attributed to the recent increase in the CPI and the consequent rise in dollar and Treasury yields. These factors have pushed gold prices to their lowest level in roughly eight weeks since mid-December of last year.

At this point, It is essential to concentrate on the primary objective of the Federal Reserve's existence and its greatest responsibility. As you might already know, the Fed's top priority is to manage inflation. In other words, the Fed would prefer to avoid the burden of the various risks that could emerge as a result of a resurgence in inflation. Consequently, the Fed has no option but to adopt a cautious approach concerning interest rate cuts.

The current economic scenario indicates an upturn in the CPI and a robust job market in the United States. This development will likely prompt the Fed to consider holding the interest rates steady, as cutting rates at this juncture would be premature. The Fed may thus continue to maintain the current high interest rates for the time being.

If the above scenario becomes a reality, what direction will gold take in the future?

There is potential for a rise in inflation, leading to the continuation of the Fed's tightening policy. This could exert upward pressure on the dollar and Treasury yields, reducing the investor’s appeal for gold ownership.

Gold traders are advised to monitor the outcome of two key indicators. The results of January retail sales and Initial Jobless claims data, which will be released this week, could exert additional downward pressure on gold prices if they raise concerns about a resurgence in inflation.

Overall conclusion

The fundamental and technical analyses provide contrasting forecasts for gold (XAUUSD). While technical analysis sees a bullish outlook with clear resistance and support levels, fundamental analysis suggests a potential bearish trend influenced by macroeconomic factors and the Fed’s monetary policy stance.

Which expert is right? Only time will tell. Whenever you are unsure about an asset, consider only acting when both schools of analysis are aligned. Also, keep in mind that with the right timing, both fundamental and technical forecasts may play out accurately, with perhaps a minor deviation.


This is not investment advice. Past performance is not an indication of future results. Your capital is at risk, please trade responsibly.


Author:

Paul Reid
Paul Reid

Paul Reid is a financial journalist dedicated to uncovering hidden fundamental connections that can give traders an advantage. Focusing primarily on the stock market, Paul's instincts for identifying major company shifts is well established from following the financial markets for over a decade.