The recent gold rally stalled on March 08, at $2,203, and has since ground lower as the market awaits this week's global Central Banks decisions on interest rates. The Bank of Japan (BOJ) increased its rates, while the Royal Bank of Australia (RBA) kept its rates unchanged while stressing the rate hike cycle has probably ended. The European Central Bank (ECB) witnessed a slowing economy, allowing for the possibility of lowering rates earlier than later. At the FOMC meeting tomorrow, it looks like they will hold rates steady. However, the statements and economic forecasts during the press conference may offer some direction to future market trends.
Source: Barchart
The weekly gold chart illustrates a multi-year trading range beginning in August 2020 and lasting until December 2023. After breaking out of the range based on a weekly close, the market returned and tested the top of the channel and has rallied to new highs since then. Typically, this is a bullish pattern.
The rally off the breakout retest has become extended and may need a pause or correction to relieve some of this pressure before resuming the uptrend. A catalyst for market direction is fundamentals based on what Chairman Powell says at his press conference tomorrow. If he continues his dovish tone as in prior meetings, many markets will catch a bid and advance higher. If he changes his stance and reverts to his "higher rates for longer" statement, many markets may result in a significant sell-off. Considering the markets interpreted a possibility of 4-6 interest rate cuts in 2024 after the December FED meeting, there is a lot of lower rate optimism built into market prices. Tomorrow's market direction will be unpredictable, but most would agree volatility is in the forecast.
Suppose the FED makes hawkish comments about future interest decisions. In that case, the gold market may experience a sell-off due to the extended price level gold has reached without any meaningful correction. With the upcoming seasonal pattern we will discuss, the sell-off could create a better buying opportunity for the next price advance.
If the FED is more dovish and leads the markets to continue to expect lower rates, then the fear of missing out (FOMO) traders will be blindly buying as prices ratchet higher.
Commitment of Traders (COT) Report
Source: CMEGroup
The COT report for managed money traders shows they continue to buy gold (blue bars) on strength. Gold prices (yellow line) bottomed in October 2023. As prices have increased, the trend following managed money funds has added to their long positions.
They hold more long positions now than at any time since March 2022. Combined with all-time highs and managed money holding significant long positions, the gold market may be waiting for an excuse to sell off.
Seasonal Pattern
Source: Moore Research Center, Inc. (MRCI)
Historically, the June gold futures contract has a seasonal low (blue line) during December. Instead, the low occurred in October. MRCI research has found that early seasonal lows lead to more extended market moves in time and price, supporting gold's upcoming seasonal buy. Currently, gold prices are in a corrective window that usually begins near the end of February and continues into approximately mid-March. Where prices bottom and resume the seasonal uptrend.
MRCI has found that gold has closed higher on approximately April 11 than on March 22, 12 out of the past 15 years, two of those years never had a daily closing drawdown.
It's important to note that while seasonal patterns can provide valuable insights, they should not be the sole basis for trading decisions. Traders must also consider other technical and fundamental indicators, risk management strategies, and market conditions to make well-informed and balanced trading choices.
In conclusion
The recent gold rally, which peaked on March 08 at $2,203, has encountered resistance as markets await vital decisions from global Central Banks on interest rates. The Bank of Japan (BOJ) has raised rates, while the Royal Bank of Australia (RBA) has opted to maintain its rates, signaling a potential end to the rate hike cycle. The European Central Bank (ECB) contemplates rate reductions due to a slowing economy. Meanwhile, the upcoming FOMC meeting is expected to maintain current rates, with Chairman Powell's statements during the press conference likely shaping future market trends.
Technically, the weekly gold chart indicates a bullish pattern following a breakout from a multi-year trading range. However, the extended rally may require a correction before resuming its uptrend. The Commitment of Traders (COT) report suggests that managed money traders are heavily positioned long, potentially setting the stage for a near-term sell-off.
Considering seasonal patterns, gold typically experiences a corrective window from late February to mid-March, followed by an uptrend. Historical data from the Moore Research Center, Inc. (MRCI) indicates a seasonal buy opportunity, with gold often closing higher in mid-April compared to late March.
The upcoming FOMC meeting and Chairman Powell's remarks will likely dictate short-term market direction, with volatility expected in response to the Fed's tone on future interest rate decisions.
On the date of publication, Don Dawson did not have (either directly or indirectly) positions in any of the securities mentioned in this article. All information and data in this article is solely for informational purposes. For more information please view the Barchart Disclosure Policy here.
