Gold Outlook: Capitalizes on heightened regional tensions

Gold’s price appears to have moved higher since our last report, following the developments in the Middle East. Today we are to discuss the fundamental challenges laid ahead for the precious metal as well as upcoming financial releases that may affect the direction of its price action. Finally, we will be concluding this report with a technical analysis of gold’s daily chart.

The correlation between USD and gold

The classic perception of the market for a negative correlation between the USD and gold’s price seems to have not been in place over the past week. In particular gold’s price gained significant ground while in the same period, the USD also managed to edge slightly higher.

It should be noted that during the same timeframe, US yields seem to have moved lower. Hence, we see the case for the antagonistic relationship between gold’s price and US bonds as safe haven instruments to have been “re-activated” in the past week.

Therefore, should US yields continue to decline, we may see trader’s attention turning away from US bonds, as their interest-bearing status may currently not be as appealing. In comparison, gold which is a non-interest-bearing asset, may see inflows which in turn could support its price. Overall, we expect the high number of important financial releases to result to increased volatility during this week.

Middle East Tensions maintained

Last week, Israeli forces seized control of the Gazan side of the Rafah border crossing with Egypt, effectively beginning their offensive into the southern part of the Gaza Strip. The offensive does not appear to have triggered the so called “red line” that may have been expected from observers.

Nonetheless the offensive into Rafah does appear to have had a negative impact on Israel’s regional standing. In particular, Egypt according to the Wall Street Journal, has considered the downgrading of its diplomatic ties with Israel and has entertained the idea of joining the International court case against Israel. 

Moreover, the exchange of fire between Hezbollah and Israel appears to have intensified, with Israel having engaged in 20 strikes against Hezbollah targets, with Hezbollah also having launched explosive drones at a military headquarter over the past week. Hence, should the tensions in the region continue to increase, we may see safe haven inflows into gold, which in turn could provide support for its price.

On the flip side, in the event of a ceasefire agreement, or should Israel withdraw from the area, it could reduce tensions in the region. Thus, in such a scenario, gold may face safe haven outflows which could weigh the precious metal’s price. Yet at the time of this report, such a scenario appears unlikely to occur.

US CPI rates due out on Wednesday

The US CPI rates for April are set to be released tomorrow. At this point in time, the expectations are for the Core CPI rate on a year-on-year level to decelerate to 3.6% from 3.8%.

Furthermore, the headline CPI rate is also expected to decelerate on a year-on-year level to 3.4% from 3.5%. Thus, should the US CPI rates come in as expected, hence implying easing inflationary pressures, it could increase pressure on Fed policymakers to reduce the tight financial conditions surrounding the US economy.

Such a scenario could weigh on the dollar, whilst providing support for gold’s price given their inverse relationship with one another. On the flip side, should they come in higher than expected and hence imply, persistent or even an acceleration of inflationary pressures, we may see the opposite occurring.

기술적 분석

XAUUSD Daily Chart

• Support: 2335 (S1), 2280 (S2), 2222 (S3)
• Resistance: 2380 (R1), 2430 (R2), 2490 (R3)

On a technical level, Gold’s price tended to move higher since our last report, having broken above the resistance now turned to support at the 2380 figure. Based on the precious metal’s price action over the past week, in addition to the breaking above our resistance now turned to support level, we tend to switch our sideways bias in favour for a bullish outlook.

Moreover, we would like to note the upwards moving trendline which was incepted on the 3^rd of April. Yet we also note that the RSI indicator below our chart is still near the reading of 50, implying a rather indecisive market. Nonetheless, for our bullish outlook to continue we would require a clear break above the 2380 (R1) resistance line, with the next possible target for the bulls being the 2430 (R2) resistance level.

On the flip side, for a sideways bias we would like to see the precious metal remain confined within the sideways channel defined by the 2335 (S1) support level and the 2380 (R1) resistance line. Lastly, for a bearish outlook we would require a clear break below the 2335 (S1) support level, with the next possible target for the bears being the 2280 (S2) support line.

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