Gold price (XAUUSD) soared to the highest level in seven years as US and China trade conflict converged with a warning by Jerome Powell about the US economy.
XAUUSD rises to seven-month high
There are three main reasons why gold prices are soaring today. First, the US and China, the two biggest economies in the world have continued their war of words. On the one hand, the US has accused China of not providing early warning on the coronavirus pandemic. The accusations ratcheted over the weekend when a Trump official accused China of intentionally spreading the disease in the US. Also, the Trump administration has continued to increase pressure on allies to avoid Huawei products.
China has rejected all this, saying that it provided ample warning in advance. It has also blamed the US of failing to respond to the disease early enough.
Second, the US economy will take longer before it recovers, according to Jerome Powell, the Fed chair. In an interview during the weekend, the chair said that the US economy could contract by about 30% in the second quarter. This would be the worst decline for the US economy since records began. However, he said that activities of the Fed will cushion the economy from further weakness. He said:
“I would say though we’re not going to get back to where we were quickly. We won’t get back to where we were by the end of the year. That’s unlikely to happen.”
The activities of the Federal Reserve have also played a factor in gold prices. In the past few months, the bank has ratcheted its asset purchases. According to the Fed, the balance sheet has expanded from $3.8 trillion in September last year to more than $6.9 trillion. This is the highest it has ever been. The balance sheet was about $893 billion before the past financial crisis.
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A few weeks ago, I brought the long-term chart shown below. In this chart, I showed that gold price had formed a cup and handle pattern after its peak in 2011. This pattern is continuing to form.
Gold Price Cup and Handle Pattern
Now, looking at the daily chart, we see that the gold price formed a bullish pennant pattern in the past few days. This pattern is usually a continuation, meaning that it tends to break out in the upward direction. Now that it has, I expect the bulls to remain in control as they attempt to move past the next resistance level of 1,800.
On the flip side, a close below 1,666 will invalidate this trend. This price is at the convergence of the 50-day EMA and the lower side of the bullish pennant pattern.
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