This article was written exclusively for Investing.com
Thanks to the recent weakness in bond yields and the US dollar, gold has been able to put up a decent fight in the last month or so as prices tested some key long-term technical levels. While the technical backdrop has improved a little bit, from a macro point of view the risks still remain tilted to the downside for the near-term outlook for gold prices.
Let’s start with the technical first. Gold’s apparent double bottom at around $1676/77 may turn out to be a key reversal pattern, but I have my doubts. The underlying trend has been bearish since the middle of last year. So, the recent recovery may just be a corrective move instead. We will find out which is the case soon as prices test some key resistance levels.
Gold has already tested the key hurdle in the $1755-65 range overnight. This area was previously support and has now turned into resistance. It remains to be seen whether more losses will now follow as prices test short-term support, at $1745 at the time of writing.
- From a bearish point of view, a break below Thursday’s thrust candle at $1733 could be the trigger behind a sell-off, as presumably lots of sell stops from the longs would be resting there. If that level is breached, then gold could be heading down to, and possibly below, the double bottom low of $1676/77 next.
- From a bullish point of view, gold’s technical outlook would only turn positive if it manages to break the bearish trend line and reclaim the pivotal $1800 level again. Thus, even if it manages to rise a little further from here, this would not necessarily mean the end of the bear trend. The bulls need to see a clear higher high above the $1800 area.
Meanwhile from a macro point of view, although the FOMC minutes revealed earlier in the week that there are no imminent changes to be expected in US monetary policy, the relatively fast deployment of COVID vaccines and ongoing fiscal and monetary stimulus measures point to a strong economic recovery in the US. This should keep the US dollar and bond yields underpinned, as the Fed may be forced to tighten its belt faster than it wants to. They certainly wouldn’t want to overcook inflation and then apply the brakes harshly. So, watch out for a change of tone from Jay Powell and Co. in the coming weeks.
So, in my opinion, bond prices will likely remain supported going forward. This should put a floor under the dollar and a ceiling over yields, increasing the opportunity cost of holding the non-interest-bearing and buck-denominated precious metal. Indeed, if the 10-year US bond yields rebound from THIS key support area, then the dollar could resume higher and gold potentially lower:
