Gold Technical Analysis: Gold Price Corrects Downwards

The gold price XAU/USD is still in a downward correction phase.

After the performance at the end of last week’s trading, the price of gold (XAU/USD) continued in the downward correction with losses extended to the support level of $1850 per ounce, the lowest price for more than a month.  

Gold investors are preparing for important and influential economic data this week, which in turn will affect the dollar and, in turn, the price of gold.  

During yesterday’s trading, American stocks rose as the Wall Street markets await a report explaining whether American inflation continues to calm down or perhaps prepares the market for worse pain. According to trades, the S&P 500 rose by 0.9% ahead of Tuesday’s report on US consumer inflation across the country. This is coming off his worst week in almost two months.

The Dow Jones Industrial Average was up 292 points, or 0.9%, at 34,161 as of 11:05 a.m. ET, while the Nasdaq Composite was up 1.2%. 

High US inflation and the Federal Reserve’s response to it with rising interest rates have been at the heart of the sharp moves on Wall Street for more than a year. The Federal Reserve raised interest rates sharply to their highest level since the dawn of the Great Recession to reduce the worst inflation in generations. Higher rates can kill inflation, but they do so at the risk of pushing the economy into a deep recession and eroding investment prices.

Economists expect a report today Tuesday to show that American inflation slowed to 6.2% in January. That will be less than 6.5% in the previous month and from a peak of more than 9% in the summer. Perhaps more important than the total number is what the data on the prices of services outside the home shows, and inflation has remained high there, when it has started to fall in other areas. 

A worse-than-expected reading could raise fears that the US Federal Reserve Board will remain tighter on prices than expected, which could mean more pain for Wall Street markets. Meanwhile, the cooler-than-expected numbers could stoke renewed hopes that were rising earlier this year for the Federal Reserve to ease interest rates. Treasury yields jumped last week after investors pulled back their expectations for rates closer to the Federal Reserve, which said it plans to keep interest rates higher for longer to ensure the job gets done on inflation. 

Bond yields were relatively flat on Monday ahead of the inflation report. As the yield on the 10-year Treasury note, which helps determine the price of mortgages and other important loans, fell to 3.73% from 3.75% late on Friday. The two-year yield, which tends to move more based on Fed expectations, was at 4.53% and near its highest level since November. 

All the worries about inflation and rates are happening against the backdrop of an unquestionably strong earnings season. Companies in the S&P 500 are on track to report a roughly 5% decline in earnings for the final three months of 2022, compared with a year earlier, according to FactSet. According to experts at Credit Suisse, this is shaping up to be the worst non-recession earnings reporting season in 24 years. Pessimism is also growing about earnings for the first three months of 2023, with lower expectations.

The continued decline in corporate profits is one reason why analysts at Morgan Stanley are wary of the year-to-date rally in stocks, even if they pulled back a bit last week. The S&P 500 is up 7.5% for 2023 so far, though it’s still stuck in a “bear market” after falling more than 20% from last year’s high.

Purchases of gold by international banks:

Global central banks closed 2022 with net purchases of 28 tons of gold in December. Including the large unreported purchases, this raised total central bank purchases of gold in 2022 to 1136 tonnes. It was the second highest level of net purchases ever, dating back to 1950, and the thirteenth year in a row of net purchases by the Central Bank of gold. 

China officially started buying gold again in November and made another big purchase worth 30 tons in December. This has led to China’s total gold reserves rising to more than 2000 tons for the first time. China’s central bank accumulated 1448 tons of gold between 2002 and 2019, then suddenly fell silent. Many speculate that the Chinese continued to add gold to their holdings during those silent years. 

There has always been speculation that China has much more gold than it officially discloses. As Jim Rickards pointed out in Mises Daily in 2015, many people speculate that China holds several thousand tons of gold “off the books” in a separate entity called the State Administration of Foreign Exchange (SAFE). For its part, the Central Bank of Turkey (Turkey) continued its ongoing purchases in December, adding another 25 tons to its bloated gold reserves. Over the course of 2022, Turkey added about 150 tons of gold to its treasury. Croatia bought tons of gold after not reporting any changes in its gold reserves since 2001. 

After a pause in November, the Reserve Bank of India resumed buying gold in December, with a modest purchase of 1 tonne. India ranks ninth in the world in terms of owning gold. Since resuming purchases in late 2017, the Reserve Bank of India has purchased more than 200 tons of gold.  

The total central bank purchases for 2022 of 1136 tons represents a 152% increase from 2021. This was the highest level of annual net central bank purchases of gold since the dollar-to-gold peg was suspended in 1971, and the second highest annual total ever. (The record was in 1967). According to the World Gold Council, there are two main drivers behind central banks buying gold – its performance in times of crisis and its role as a long-term store of value. It is not surprising, then, that the year suffered from geopolitical uncertainty and rampant inflation, and central banks chose to continue adding gold to their coffers and at an accelerated pace.”

Today’s XAU/USD Gold Price Predictions: 

• The gold price XAU/USD is still in a downward correction phase.
• Breaking the support level of $1850 per ounce will move the technical indicators towards oversold levels.  
• If the US dollar remains strong due to today’s US inflation numbers, prices may be exposed to further downward momentum and losses to the support levels of 1824 dollars per ounce. 
• On the other hand, and in the same period of time, I still see that breaking the resistance of $1885 per ounce is the most important for the bulls to control the performance of gold XAU/USD again.

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