Dollar break through 92! Gold drops nearly 5%(with trading strategy)

Gold prices edged higher on Friday, but were on track for their worst week since March 2020 after the U.S. Federal Reserve’s hawkish message on monetary policy bolstered the dollar and bond yields, while denting bullion’s appeal as an inflation hedge.

Spot gold was slightly up 0.74% to $1786.05 per ounce as of 11:50(GMT+8) in early Asian trade.

The dollar index hit a two-month high and was headed for its best week in nearly nine months, making gold more expensive for holders of other currencies.

Fed officials have begun telegraphing an exit from the central bank’s extraordinarily easy monetary policy that so far is smoother and signalled to be speedier than when the reins were tightened after the last crisis.

Higher interest rates will dull gold’s appeal as they translate into a higher opportunity cost of holding it.

The metal slipped to the lowest in six weeks on Thursday as the dollar continued to strengthen, a day after Fed Chair Jerome Powell said the central bank would begin a discussion about scaling back bond purchases. It’s the first major hawkish turn from the central bank whose deluge of stimulus has been critical to bullion’s strong performance since the start of the pandemic.

The central bank also released forecasts that show it anticipates two interest-rate increases by the end of 2023 -- sooner than many thought -- which helped boost the dollar and U.S. bond yields, hurting gold. Bullion, which declined the most in five months on Wednesday, broke through a number of key technical support levels, including falling below its 100-day moving average.

“We have a negative outlook, expecting gold to fall to $1,600 an ounce over the next six to 12 months,” said Giovanni Staunovo, an analyst at UBS Group AG. “At some point the Fed will not talk about taper but also implement it.”

Bullion fell as investors weigh the outcome of the Fed’s two-day gathering. Despite the hawkish pivot, Powell said the interest-rate forecasts “should be taken with a big grain of salt,” and cautioned that discussions about raising rates would be “highly premature.” The central bank also upped its inflation forecasts, though Powell continued to insist price pressures would prove transitory.

“Once again the million dollar question is whether inflation will be a passing phenomenon or longer lasting?” Ole Hansen, head of commodity strategy at Saxo Bank A/S, said in a note. “For now the market trusts the judgment of the Federal Reserve and until data potentially proves them wrong, gold and with that also silver may face another challenging period.”

Indicative of sentiment, SPDR Gold Trust, the world’s largest gold-backed exchange-traded fund, said its holdings fell 0.4% to 1,041.99 tonnes on Thursday.

George Milling-Stanley, chief gold strategist at State Street Global Advisors, said investors have nothing to fear from the Federal Reserve and shouldn't pay too much attention to projections that are two years away.

"I'm looking at the gold market right now and I think this could prove to be a good time to buy," Milling-Stanley said. "I see a lot of panic selling and I don't think that can last much longer. Basically, the markets saw higher inflation and higher interest rates, but they completely ignored the fact that the hikes are at least two years away. A lot can happen in two years."

Milling-Stanley added that once this wave of panic selling ends, gold will still be in a good position to push back up above $1,900 an ounce and take a run at the record highs above $2,000 an ounce by the end of the year.

The comments come as gold prices lost significant ground since Wednesday's Federal Reserve monetary policy meeting. August gold futures last traded at $1,780.40 an ounce, down more than 4% on the day.

Milling-Stanley said that a lot of the Fed's projections depend on what happens with inflation. He explained that the Federal Reserve is not convinced that higher inflation will be permanent. Milling-Stanley added that if inflation falls back to between 2% and 3%, the central bank will be in no hurry to raise interest rates.

"I think the only thing that will prove to be transitory will be this correction in the gold price," he said.

Trading strategy (Source: Trading Central)

Our pivot point is at 1775.00.

Our preference: short term rebound.

Alternative scenario: below 1775, expect 1764.20 and 1757.70.

Comment: the RSI is above its neutrality area at 50. The MACD is negative and above its signal line. The MACD must break above its zero level to trigger further gains. Gold (CME) (Q1) is trading above its 20 period moving average (1778.60) but under its 50 period moving average (1793.10).

Supports and resistances:

1818.60 **

1812.10 *

1805.70 **

1799.20

1785.30 last

1779.20

1775.00 **

Guideline for Trading Central strategy

Trend chart reading guideline

1. First look at the time period in the upper left corner of the chart：

‧30MIN and 1H chart shows the trading suggestions for intraday

‧Daily chart shows the market trend analysis in next 2-3 days

2. The blue horizontal line on the chart marks the pivot: pivot indicates the reversal of the market. When the price is above the pivot, it indicates an upward trend, when the price is below the pivot , it indicates a downward trend. When the price breaks through the pivot, the trend is reversed.

3. The red and blue thin curves in the Candlestick chart chart are technical indicators: Red line is  MA20+Bollinger bands, Blue line is MA50. under the Candlestick chart chart are also the technical indicators:  Blue line is RSI, Red line is 9MA;

4. The green horizontal line is the resistance level for a price increase, and is also the profit target for long orders; the red horizontal line is the support level for a price decrease, and is also the profit target for short orders.

How to use TC strategy？

1.[Pivot] is the reversal line of the market trend. When the price up the pivot line which means in Bullish, you can open a long position or Buy. on the contrary, when the price under pivot line which means in bearish. You ‘d better make short positions or Sell. 

2. [our preference] is the main trading suggestion for your reference. You can exit your trading refer to this target or close positions before it.

3. [Alternative scenario] is the plan B for your reference. 

4. [Comment] is the technical analysis of market trends and technical support for trading strategies. 

5. [Supports and resistance] Supports are levels where the price tend to find support as it falls.

Resistances are levels where the price tend to find resistance as it rises. So, exit before the trend reverse.