Gold Just Broke Below the Ascending Wedge Trend Line, What’s Next?

Witawat (Ed) Wijaranakula, Ph.D.
Wed Feb 18, 2015

The price of gold extended yesterday's loss and dropped below the psychological U.S. $1200.00 per ounce level on Wednesday, before bouncing back to close at U.S. $1200.20 per ounce, after the release of the U.S. Federal Reserve minutes saying that the Fed is in no rush to raise interest rates. 

The gold price plunged 1.52% yesterday after Federal Reserve Bank of Philadelphia President Charles Plosser said that the central bank is “really close” to raising rates. Although Mr. Plosser is a non-voting member of the Federal Open Market Committee (FOMC), the markets swiftly responded to his comments. 

The just-released Federal Reserve minutes suggest that it might be too soon for the Fed to hike rates as the U.S. economy is still recovering. Recent U.S. economic data has not shown any signs of a pick-up in consumer spending or retail sales, despite an improvement in the U.S. job market, upbeat consumer confidence, and cheaper gas prices. 

Evidence of this is last week's report from the Bureau of Economic Analysis (BEA), the U.S. Commerce Department, showing that the core retail sales excluding automobiles, gasoline, building materials and food services rose only 0.1% in January, missing economists’ expectations of a 0.4% increase.

Based upon the BEA report, Barclays is trimming its first-quarter U.S. GDP growth estimate from 2.5% to 2.2% while J.P. Morgan cut its estimate from 3% to 2.5%. That means that the advance estimate of first-quarter 2015 U.S. GDP, scheduled to be released on April 29, could be below economists’ consensus. 

Although there is only moderate correlation between the price of gold and the U.S. GDP, a weak U.S. dollar is observed to be associated with weak U.S. economic data, such as the GDP. 

A low-inflation environment and concerns about China’s gold demand have put the price of gold under downward pressure since mid-January of this year. The recent BEA report, showing that the headline personal consumption expenditures (PCE) price index rate for December increased by only 0.75% year-on-year, down from 1.15% the previous month, confirmed the fear.

Based upon the amount of gold withdrawals from the Shanghai Gold Exchange (SGE), Chinese gold demand is expected to be about the same or slightly lower than in 2014. With a slowdown in the Chinese economy, it could be difficult to speculate what the Chinese gold demand will look like after the seemingly robust demand running into the Lunar New Year. 

From a technical viewpoint, the gold price just broke down the ascending wedge and closed below the 100-day SMA. The average decline of a confirmed ascending wedge pattern is about 20% after the price breaks the lower trend line. Nonetheless, the price could first fall back to retest the base of the wedge at U.S. $1142 per ounce, before taking a big dive.

If the gold price continues its pull back, the next supports are at U.S. $1190 per ounce, U.S. $1180 per ounce and U.S. $1170 per ounce, respectively. 

Here is what Goldman Sachs has to say about gold prices. The investment banker cut its gold price forecasts to US $1,089 per ounce for 2016 and US $1,050 per ounce for 2017, citing low inflation and higher interest rates in the U.S. as the key considerations behind the downward revisions.

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