Gold Strong Trend Could Reverse As Risks Ease

On Monday last week, the International Monetary Fund (IMF) released a report showing that the world economy would see a lower growth than had been expected. For 2019, the growth was lowered to 3.7% from the previous 3.9%. This was a big deal because previously, the expectations from investors was that the economic growth would continue.

A week before, Automatic Data Processing (ADP) had released economic data that showed a ramp up in private sector employment. The data showed that more than 230K people were employed in September. On Friday that week, the unemployment number declined to 3.7%. This was the lowest level in almost 50 years.

The interpretation of this was that the Fed would continue raising interest rates. This led to a sharp increase in the yields of Treasury yields. At the same time, the dollar started to weaken following a tirade from Donald Trump. In the past week, Trump has continued to criticize the Fed for continuing to increase interest rates. Just yesterday, he said that the Fed was the biggest threat to his administration.

His sentiment has been shared by other esteemed professionals. They believe that the Fed has no need to accelerate the interest rate hikes mostly because of the forecasted slow growth. The growth this year has been attributed to the tax cuts, increased government spending, and the impacts of deregulation. Economists argue that these effects will start winding down in 2019. This and the fact that other central banks are not in a tightening mood should remove the pressure from the Fed. In addition, there are concerns about the flattening yield curve.

These concerns led the dollar to have a tough time last week. As the dollar declined, gold moved higher. The two usually have an inverse relationship because gold is usually priced in dollars. As the dollar strengthens, gold tends to weaken.

This week, the price of gold has remained at elevated levels but the upward trend has eased. This has happened as the value of the dollar remains low. Last week, the XAU/USD pair reached a high of 1223 and today, the price is slightly lower at 1222. This price is along the 14 and 28-day SMA on the four-hour chart below. A closer look at these moving averages shows that a crossover is about to happen, which means that the strong upward trend could be about to end.