As the US dollar remained supported on Monday after having bounced off multi-year lows last week, the price of gold tentatively broke down below a major uptrend support line and dropped towards the key $1300 psychological support level. For more than a week, gold has dropped from its new one-year high above $1350 as the dollar has rebounded modestly, bets on a Fed rate hike by the end of this year have increased, and both risk aversion and market volatility remain at exceptional lows.
Much of gold's short-term directional bias will hinge upon the upcoming FOMC policy decision on Wednesday. Any increase in outlook for rate hikes through the end of this year and into next year – as a potential result of higher recent inflation readings – would be deemed a hawkish shift for the Fed, which would likely lead to a boost for the US dollar and further slide for dollar-denominated gold. If the Fed remains characteristically dovish in the face of higher inflation data, however, the dollar could very easily be knocked back down, which would also likely lead to a relief surge for gold.
As it currently stands, the lack of any major risk concerns that have been able to rattle the markets has contributed to gold's lackluster price behavior in the past week. When combined with the specter of higher interest rates, as well as a possible dollar recovery, further pressure has been placed on gold prices.
From a technical perspective, Monday's extended fall in the price of gold resulted in a tentative breakdown below a key uptrend support line extending back to the early July lows. The next major support level to the downside, as previously noted, is the $1300 psychological support level, which was strong previous resistance as well as the 38% Fibonacci retracement of the low-to-high span from early July to early September. If price remains supported above $1300, there is a strong potential for a gold rebound on any resumption of dollar weakness, Fed dovishness, or risk aversion. Any sustained breakdown below $1300, however, would be a major technical event, in which case the next key downside target would be around the $1250 support/resistance level.
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