Gold has been able to regain its poise after the sharp drop we observed earlier this week. The metal has found decent support around the $2,300 level, with traders keeping a close eye on bond yields and incoming US data. Overall, not much has changed as far as gold’s long-term bullish outlook is concerned, writes Fawad Razaqzada, technical analyst at TradingCandles.com.
With prices no longer severely overbought on the technical front, we have seen a bit of dip-buying again. While the potential for a larger correction is always there, my base case scenario is that dips will be shallow, and we could see repeated all-time highs in the months ahead.
While the potential for a more meaningful correction exists, many investors who have missed the recent gold rally are eyeing opportunities to buy on dips. Supporters of gold point out that recently gold prices have shown resilience despite the elevated yields and dollar strength, with the DXY remaining above 105.50.
XAUUSD Chart
They argue that with prices no longer excessively overbought, the trend could resume, especially considering gold's fundamental drivers such as continued central bank purchases and inflation hedging. After years of above-forecast inflation, most global fiat currencies have lost significant value, leading investors to perceive gold as a reliable hedge against inflation, contributing to its strong performance.
This is in my view the main reason behind gold’s bullish trend in recent years. Meanwhile, critics of gold argue that high yields and reduced expectations for Fed rate cuts in 2024 will likely support the dollar, keeping pressure on gold and other dollar-denominated metals. However, so far in 2024 this hasn’t been the case.
An additional source of worry for investors, and another supporting factor for gold, is the rising level of interest payments by the US government. This is not going to be addressed any time soon. For now, bond investors don’t seem to be too concerned about the possibility of a US default, although gold’s price action suggests otherwise, with the metal rising to repeated all-time highs recently despite the renewed rise in yields.
Regular readers of my posts know that I’ve been anticipating a pullback in gold prices in recent weeks, which finally occurred at the beginning of this week. This was partly due to reduced concerns about a direct conflict between Israel and Iran, dampening gold's safe-haven appeal.
However, the decline in geopolitical tensions wasn't the primary reason for my forecast. It was mainly due to the extreme overbought conditions in gold prices from a technical standpoint, which needed a correction. Additionally, I had some concerns about the ongoing sell-off in bond markets, pushing up yields and raising the opportunity cost of holding non-interest-bearing assets.
While the latter concern still holds, gold prices are no longer as overbought as they were a couple of weeks ago.
