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Gold Price Forecast: Gold Breakdown to 4-Month Lows – What's in Store for Q3?

Gold talking points:

Gold prices spent much of the past six weeks in a range. The final week of Q2 was especially choppy with little trend in-place. But, as I looked at on Tuesday, there was the initial makings of some bearish potential as produced by a descending triangle-like formation.

Well, as markets do, the first day of Q3 brought a far different tone than the prior six weeks as prices put in a quick breakdown to support at the 1785 level that I was following throughout last quarter. That price was the May swing-low and given this morning’s quick test below that, we now have fresh four-month-lows in Gold prices.

At this point there’s some bounce developing from that support but, given the culmination of factors with recession worries populating the backdrop, bearish themes could retain some attractiveness here.

Gold Four-Hour Price Chart

gold four hour chart

Chart prepared by James Stanley; Gold on Tradingview

I had noted in the title of that last article, the big move awaits. So, was this it, already, in the opening hours of Q3?

I don’t believe that to be the case. The longer-term range in Gold prices is still holding. The ‘bigger move’ that I was referring to was looking for a continued breakdown towards the two-year low at 1673. That level had a strong pull on price action in 2021, helping to elicit two separate support bounces. But, a breach of that level further indicates greater unwind of the bullish trend that built in 2020, fueled by aggressive FOMC stimulus and low rates – both of which have already begun to dissipate.

For support, I’m spanning the zone from 1673 up to 1695, which is a 61.8% Fibonacci retracement of the pandemic move.

Gold Weekly Price Chart

gold weekly chart

Chart prepared by James Stanley; Gold on Tradingview

Gold Big Picture

I remain bearish on Gold for Q3 and the rationale is both fundamental and technical. As alluded to above, the major move in 2020 was very much fueled by the Fed’s low rates and extraordinary accommodation. And, as inflation remained low, along with rates, the door was open for further gains in Gold.

And even as inflation ticked-higher while rates stayed low, there was still a bullish argument for Gold. If fiat is losing purchasing power and we’re seeing a general sense of USD-weakness, well that can help to support Gold prices.

The real killer for Gold is the response to high inflation which is higher rates. There’s now a greater opportunity cost for that capital that’s locked up in a non-yielding asset, and this helps to explain why both Gold and cryptocurrencies have been on their back-foot of late.

As proof of concept, one merely needs to observe Gold’s performance in the first-half of the 80’s. That was the last stagflationary environment in the US and the US Dollar was screaming higher as rates were jumping in effort of tempering inflation.

Gold prices fell by 65% over this period of time before finally digging into support around the $280/oz mark which largely held for the next 20+ years.

Gold Monthly Price Chart

gold monthly price chart

Chart prepared by James Stanley; Gold on Tradingview

Gold Strategy for Q3

Gold prices have been especially jumpy around support breaks of late, illustrated well with this morning’s move that saw a quick push down to a four-month-low followed by a rally right back into resistance at prior support.

So chasing seems dangerous given recent dynamics and this highlights the attractiveness of catching lower-high resistance, in effort of playing swings that may turn into trips back to support and, possibly even a breach of support to another fresh low.

And in terms of resistance, there’s a few possible places to look for that. The area of support that I had looked at on Tuesday is already back in the picture and, above that, is another spot around the 1820 level. Beyond that we have the Fibonacci level at 1832 and a break above that is going to make the bearish theme look less attractive, and there may be something else going on. But, the situation can be evaluated at the time for further insight.

Gold Four-Hour Price Chart

gold four hour chart

Chart prepared by James Stanley; Gold on Tradingview

— Written by James Stanley, Senior Strategist for DailyFX.com

Contact and follow James on Twitter: @JStanleyFX

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