A sharp drop in the price of gold leads to major chart damage

As a direct result of an extremely strong US dollar, the price of gold collapsed today, which led to major technical damage. The dollar has appreciated significantly over the past two weeks, however longer-term studies show that the dollar has been on an upward trend since early 2021 when the dollar index was set at 90.

The Dollar Index compares the US Dollar to a basket of six major currencies. Today the dollar index is up 1.34% for a total of 1.406 points and currently stands at 106.315. Although the dollar’s strength has picked up over the past two years, the dollar’s strength accelerated in March when the Federal Reserve began raising interest rates for the first time since 2018.

Since March’s rate hike of ΒΌ%, the US Federal Reserve has raised interest rates from near zero to between 1.5% and 1.75%. During the last three FOMC meetings, the US Federal Reserve raised interest rates by 25 basis points in March, 50 basis points in May and 75 basis points in June. The Federal Reserve is also expected to hike rates another 75 basis points during the FOMC meeting later this month.

The Federal Reserve’s rate hikes came in response to extraordinarily high inflation, which remains at a 40-year high. The latest US government data shows that the CPI (Consumer Price Index) was 8.3% in May. Equally alarming is the latest economic data out of Europe, with the May 2022 CPI for the eurozone now fixed at 8.8% yoy.

It was rising interest rates that provided strong support for the dollar, taking it to a 20-year high today. In the week of June 27th, the dollar index opened just below 104 and has gained over 2% in the last six trading sessions. Based on the dollar’s recent breakout, our technical studies show that the next level of resistance does not occur until 107.467. Additionally, it shows that major resistance is emerging at 112.95 on a technical level.

Fears of an inevitable recession due to rising interest rates have not only fueled the dollar’s strength, but also fueled selling pressures in gold. Combined, these two forces have moved gold down $300 from its March high for the year of $2078, a price decline of 15.158%.

On a technical basis, this caused major chart damage through two important technical studies. First, today’s price drop has taken gold below its 78 percent Fibonacci retracement. The data set used for this retracement series begins in August 2020 when gold traded from a low of $1671 to a March 2022 high of $2078. The second technical study used to confirm that gold has suffered chart technical damage is a compression triangle. Today’s sharp decline in price took gold prices through the lower trendline support. The support trendline was created by fixing the two recent higher lows. The first low occurred on March 16 when gold traded to a low of $1785, with the second low set at $1805, a low that occurred in mid-June of this year.

Based on continued selling pressure in gold, capped by today’s drop of $35+, where could gold find technical support? The chart above shows potential support levels by looking at recent price lows. The first potential support level is at $1720. This level is based off a short-term low recorded in October 2021. Below that is the August 2020 low when gold touched $1673 before recovering and trading higher.

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