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Gold (XAU/USD) closed today at $1967.40 an ounce, up $3.10 or 0.16%.

Last week, we saw support from the Fed’s announcements of lower interest rates for longer, and the Fed’s willingness to allow inflation to “overshoot” its 2% annual target for some time.

The recent gold rally has been mainly due to inflation-driven demand, and the Fed’s new monetary policy just added fuel to the fire.

When investors expect higher inflation in the future, they buy gold as an “alternative currency”.

Gold is often used to hedge against inflation because, unlike fiat currencies like the U.S. dollar, its supply doesn’t change much year to year.

Also, as economic conditions start to deteriorate further in the U.S, the possibility of additional Fed stimulus remains a strong catalyst to keep the gold run going.

After a sharp correction from earlier in the month, gold has just been chopping around for the past couple of weeks, unable to make any new swing highs nor swing lows.

Gold Price Chart - August 31, 2020

Looking at the daily chart above, the price is still trading above its 50 SMA (purple line) and well above its 200 SMA (blue line), so it still remains in a bullish trend.

Gold's Trend Strength

The good news is that higher lows have been forming.

Traders appear to be following the “inflation trade” that was reignited following Fed Chairman Jerome Powell’s dovish speech on monetary policy and it seems like gold is gathering energy for another move up.

Price seems to have found support off the ascending channel, bouncing off of it a couple of times last week.

It’s now trying to break through a near-term resistance area involving the top of the ascending channel, descending trend line, and its 20 SMA (yellow line).

If price can close above this area and above the high from last Thursday, I look for gold to rise to 2000, and then to retest its all-time high at 2075.

It’s important that the ascending channel support and last week’s low of 1902 holds.

When watching gold, it’s important to keep an eye out on the U.S. dollar.

Most of the time, gold and the U.S. dollar share an inverse relationship.

Gold vs. Dollar

When the U.S. dollar appreciates, the price of gold (XAU/USD) tends to fall. Conversely, when the U.S. dollar falls, gold tends to appreciate.

Since international gold is denominated in USD, any weakness in the U.S. dollar pushes up the price of gold and vice versa.

A falling dollar increases the value of currencies of other countries. This makes commodities priced in U.S. dollars, such as gold, cheaper. These cheaper prices then tend to increase demand.

As you can see from the chart above, gold and the DXY have been moving in opposite directions since mid-April.

The U.S. Dollar Index or DXY measures the performance of the dollar against a basket of other currencies including EUR, JPY, GBP, CAD, CHF, and SEK.

If the U.S. dollar continues to fall, this will be great for gold.

If we look at a daily chart of DXY, we can see it’s in a strong downtrend, given that the price is below its 50 SMA (purple line) and 200 SMA (blue line).

US Dollar Index - August 31, 2020

It’s also trading within a descending channel.

The 92 handle looks to be near-term support, so if we can see a breakdown (downside breakout) below this, I expect the U.S. dollar to continue to fall.

This would help push gold back up to its high of 2375 and potentially make new highs.

Given that the trend remains bullish, the path of least resistance for gold remains upward, so I don’t want to fight the trend and instead, trade with it.

Here’s my trade idea.

Buy XAU/USD if all the following conditions are met:

  • Price closes above the ascending channel
  • Price closes above the 20 SMA (yellow line)
  • Price closes above yesterday’s high (1976.40)

My initial stop loss (SL) will be 1885.

My profit target (PT) will be left open. I look to target at least the most recent high of 2075, but will evaluate price action as the price nears the most recent swing high (August 18) at 2015. 

This content is strictly for informational purposes only and does not constitute as investment advice. Trading any financial market involves risk. Please read our Risk Disclosure to make sure you understand the risks involved.