- Gold's pullback continues as the US dollar and bond yields rise, pressuring precious metals.
- Traders are eyeing key support levels as gold slips below crucial technical zones.
- Inflation and retail sales data this week could further shape gold's direction amidst market shifts.
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Gold has started the new week on the back foot, easing lower straight from the Asian open overnight. Both gold and silver continued their pullback last week, marking a second consecutive decline. With Trump’s election win seen as positive for geopolitical stability, gold faced downward pressure.
It slipped 1.9% to end the week at $2,684, while silver dropped 3.5% to close at $31.31. In contrast, Bitcoin hit new record highs last week, before adding fresh gains at the start of this week. Precious metals could face a bumpy road ahead, after a wonderful year until last week’s pullback.
Rising US dollar and bond yields and Trump’s big victory should hold the metal back for a while, as prices continue to ease from severally overbought technical levels. This might turn out to be a healthy pullback for gold, removing some froth after its relentless rally.
Trump’s win, gold’s loss
Last week was a big one for the financial markets. Despite predictions of a close race, Donald Trump secured a sweeping victory, with Democrats taking most of the swing states and achieving a decisive win.
Markets responded positively, with US equities and cryptocurrencies surging in the aftermath. Meanwhile, the Federal Reserve cut rates by 25 basis points, as anticipated, though Chair Powell’s remarks offered no fresh insights or guidance.
Rising yields and US dollar could hurt metals further
In the last couple of weeks, gold has finally bowed to rising yields and a strong US dollar. Rising bond yields make assets such as gold and silver that don’t pay any interest, less attractive.
Rising yields increase the opportunity cost of holding onto these types of assets, since you can get a fixed nominal return by holding “risk free” government debt. The fact that gold is priced in USD will make it dearer for foreign buyers, weakening demand.
Following the weaker-than-expected October nonfarm payrolls, third-quarter GDP, and JOLTS job openings, last week saw some of the main US data releases come ahead of expectations, including the ISM services PMI (56.0 vs. 53.8) and UoM Consumer Sentiment (73.0 vs. 71.0). But last week wasn’t about data at all, as the elections dominated the agenda.
The dollar only softened temporarily on Thursday before rebounding on Friday, helping the Dollar Index to post another weekly green candle as it finished near the key 105.00 handle. This level is quite important from a technical perspective. A clean break above this level could see the DXY bulls aim for the highs of June (106.13) and April (106.51), and potentially even that of October 2023 (107.35). If the DXY rises further, then gold should, in theory, go in the opposite direction.
US inflation and retail sales data are among week’s macro highlights
This week, inflation and retail sales data will dominate the agenda, although the US economic calendar is quiet today with US banks closed in observance of Veterans Day. Meanwhile, investors will still be digesting the impact of Trump’s victory and the Fed’s decision to cut rates by 25 basis points on Thursday.
Fed Chair Powell remained reserved on whether the Republican’s sweeping victory would prompt a slower pace of rate cuts, particularly given potential shifts in fiscal policy. Despite Thursday’s sell-off, investors held their ground on the dollar, buoyed by expectations of increased government spending and tax cuts under Trump. This sentiment, combined with stronger Consumer Sentiment data on Friday, ensured the yellow metal would close lower on the week.
Gold technical analysis
Gold’s two-week losing run has certainly caused the prior strong bullish momentum to lose some strength, although that is not to say that the long-term bullish trend is over. Regular readers may recall that I have been warning about a pullback for weeks now, not only because of macro factor such as rising yields and US dollar, but the fact that the long-term momentum indicators have reached severally overbought levels.
The RSI indicator on both the weekly and monthly charts had reached well north of 80.0. While the recent weakness in gold prices have helped to ease those overbought conditions somewhat, they remain deep inside the overbought territory. More selling or a lengthy consolidation is required to allow those momentum indicators to unwind further.
On the daily time frame, we can see that gold broke below a bullish trend line that had been in place since August. It has also moved below the 21-day exponential average, providing a more objective indication that the trend has indeed turned bearish in the short-term outlook. Broken support levels at $2750 and $2708 have turned into resistance. The $2708 level is now key in so far as the short-term outlook is concerned. While it holds below this level, the path of least resistance would remain to the downside.
If the selling pressure continues, where could we see dip buyers start to show up again? For me, the key level is the 2024 bullish trend line, which comes in around the $2,600 area or thereabouts depending on how fast price gets there (if at all).
A couple of other important levels that I will be monitoring ahead of this area, include $2643 and $2625, which are short-term support levels to watch. Meanwhile, if that 2024 bullish trend line breaks decisively then we could see a much deeper correction, in which case I wouldn’t rule out the possibility of gold retesting the $2500-$2530 area again.
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Disclaimer: This article is written for informational purposes only; it does not constitute a solicitation, offer, advice, counsel or recommendation to invest as such it is not intended to incentivize the purchase of assets in any way. I would like to remind you that any type of asset, is evaluated from multiple perspectives and is highly risky and therefore, any investment decision and the associated risk remains with the investor.