After a challenging Q4 in 2016 in a context of rising bond yields and a stronger US dollar, gold seems to be getting its shine back in Q1. The technical picture is beginning to look a little more constructive and the “reflation trade”, spurred on further by expectations of higher infrastructure spending and tax cuts in the US, has thus far also benefited gold.

From a technical perspective, there are indications that the low at $1045.40, incidentally printed just ahead of the first Fed hike in December 2015, was significant and now provides medium-term support as indicated by the price channel in the chart below.

The zone provided significant resistance in 2008 and throughout much of 2009, and following the upside breakout provided solid support on the pullback in early 2010. It also corresponds to the 50% retracement of the uptrend from the July 1999 low at $253.2 to the high at $1923.7 in September 2011. Yet another reason that low appears significant is the presence of a bullish RSI divergence, as depicted by the blue lines: a very useful signal for technical analysts and contrarian investors, RSI divergences often indicate trend reversals.

Source: StockCharts.com

Another positive development in terms of price action is the bullish crossover signal of the 50- and 200-week simple moving averages, for the first time since 2002. This signal, however, is only a prerequisite for a new uptrend, and resistances at $1275/$1280 and especially $1377.5 must be breached to confirm an upside breakout from the current range. In the shorter-term, $1211 provides support, followed by $1177 and $1154. Only a break below the $1124.3 low would confirm a bigger correction to $1045.40, which as previously mentioned currently stands as medium-term support.

In terms of the Fed, as the probability of a March hike rose to nearly 80% as of last Friday’s close, some downward price pressure in the run-up to decision on March 15 is certainly not inconceivable and should be expected. As illustrated by dovish FOMC member Brainard’s speech on Wednesday, along with several speeches and comments by other members last week (Kaplan, Harker, Williams, Lacker, Dudley, Mester, Powell, and Yellen herself), recent jawboning has been hawkish, which may weigh on gold prices ahead of the decision and lead to a test of the technical supports.

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