Gold prices have been on a rollercoaster ride in 2020, with the precious metal reaching all-time highs in August before experiencing a sharp pullback. However, recent price action suggests that gold may be poised for another leg higher, with the XAU/USD breaking out of a pennant pattern and indicating potential upside towards $2,043.
First, let’s define what a pennant pattern is. A pennant is a technical chart pattern that forms when there is a significant price movement, followed by a period of consolidation. The consolidation phase is characterized by converging trend lines that form a triangle shape, with the price action becoming increasingly compressed as it approaches the apex of the triangle. The breakout from the pennant occurs when the price breaks above or below the trend lines, signaling a potential continuation of the prior trend.
In the case of gold, the XAU/USD formed a pennant pattern in late August, following a sharp rally that took prices to all-time highs above $2,070 per ounce. The consolidation phase lasted for several weeks, with the price action becoming increasingly compressed as it approached the apex of the triangle. On September 16th, the XAU/USD broke out of the pennant pattern to the upside, signaling a potential continuation of the prior uptrend.
So, what does this breakout mean for gold prices? Technical analysts often use price targets based on the height of the pattern to project potential upside or downside targets. In this case, the height of the pennant is approximately $200, which suggests a potential target of $2,243 for gold prices. However, it’s important to note that technical analysis is not an exact science and that price targets should be viewed as potential levels rather than definitive predictions.
There are several fundamental factors that could support further upside in gold prices. First and foremost is the ongoing COVID-19 pandemic, which has led to unprecedented levels of monetary and fiscal stimulus from governments and central banks around the world. This stimulus has weakened the value of fiat currencies and increased demand for safe-haven assets like gold.
In addition, geopolitical tensions between the US and China, as well as uncertainty surrounding the upcoming US presidential election, could also support gold prices. Historically, gold has been viewed as a hedge against political and economic uncertainty, and these factors could drive demand for the precious metal in the coming months.
Of course, there are also risks to the upside potential for gold prices. A successful vaccine for COVID-19 could reduce demand for safe-haven assets, while a stronger-than-expected economic recovery could lead to higher interest rates and a stronger US dollar, which could weigh on gold prices.
In conclusion, the XAU/USD breakout from a pennant pattern suggests that gold prices may be poised for another leg higher towards $2,043 per ounce. However, it’s important to consider both technical and fundamental factors when assessing the potential for further upside in gold prices. As always, investors should carefully consider their investment objectives and risk tolerance before making any investment decisions.
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