Gold analysis: Double bottom and bullish RSI divergence forming

2022年8月31日

Gold has fallen 2.1% in the last week, and it is now trading at its lowest level since July 21st, when it set the year's low of $1,680/oz.

Looking at the technical patterns, it appears that a double bottom is forming, as $1,680 is now only 1.5% below current prices.

A significant trend reversal could occur if this double bottom in prices is accompanied by a bullish RSI divergence, with the indicator failing to update new lows. Similarly, in August 2021, gold prices formed a double bottom along with a bullish RSI divergence, paving the way for a multi-month uptrend to March 2022's peaks.

To see a reversal of gold's bearish trend, either the Fed must stop raising interest rates (unlikely) or markets must lose confidence in the Fed's ability to control inflation in the near future.

Gold, unlike the US dollar, has not been a successful inflation hedge so far in 2022. The bullion has lost 4.5% since the beginning of the year, while the US dollar index (DXY) has appreciated by 13%.



In practise, market participants have had some confidence that the Federal Reserve will be able to restore inflation to target.

But what if inflation continued to soar despite interest rate increases?

Fiat currencies like the US dollar would be an asset with negative real returns if the market started to believe that despite rising interest rates, inflation will continue to be much higher than anticipated unless the economy experiences a severe downturn. In that case, large investors' attention may shift back to gold, which has historically protected against the risk of inflation expectations becoming unanchored.

Inflation expectations seem to have bottomed out in July, and they have been on the rise over the past few weeks despite rising expectations for higher interest rates, as evidenced in the 5-year and 10-year US breakeven rates. This move is telling us that the market is beginning to factor in the likelihood that inflation will remain above the 2% target for the next five or ten years.



Further increases in inflation expectations during periods when the Fed raises policy rates are a warning sign that inflation expectations are becoming unanchored and the market is starting to lose faith in central banks' ability to control inflation.

Further increases in inflation expectations during Fed rate hikes are a warning sign that inflation expectations are becoming unanchored and the market is losing faith in central banks' ability to control inflation.

Crossing this Rubicon would lead to a new bull trend in gold's price.

Idea written by Piero Cingari, forex and commodity analyst at Capital.com