Gold Outlook: Retreats from recently formed ATH

Gold’s price moved lower over the past week, after forming a new ATH. Today we are to discuss the fundamental challenges laid ahead for the precious metal, the negative correlation of the USD with gold, the recent movement of US Yields, as well as upcoming financial releases that may affect the direction of gold’s price action and a recent survey by the WGC. Finally, we will be concluding this report with a technical analysis of gold’s daily chart.

USD’s slight strengthening weighs on gold’s price

We make a start.  with the slight strengthening of the USD against its counterparts since our last report, which in turn weighed on gold’s price. The negative correlation of gold to the USD continued on Monday, with the dollar strengthening whilst gold’s price moved lower. We expect the negative correlation between the USD and gold to be maintained, in which case should the USD gain further ground against other currencies, we may see gold’s price moving lower. 

Rise of US yields

We also note that since our last report, the yields of US bonds reversed course and moved higher.  The rise of US yields applies to short-term as well as long-term bonds. It should be noted that the attractiveness of US bonds as safe haven instruments increased as the rise of US yields increased the compensation for the individual investor, while at the same time tends to decrease the attractiveness of the precious metal which is non-interest bearing.

Should US yields continue to rise in the coming week, we may see investments being diverted from gold towards US Bonds thus providing some bearish tendencies for gold’s price. 

US financial data and the Fed to affect gold’s price

We highlight the US Core PCE rates for June which are set to be released this Friday. The US Core PCE rates are the Fed’s favourite tool for measuring inflationary pressures in the US economy. The current expectations by economists are for the Core PCE rate for June to come in at 2.5%, which would be lower than the prior rate of 2.6%, thus should the rate come in as expected, it may imply that inflationary pressures in the US economy are easing.

In turn, easing inflationary pressures may increase pressure on the Fed to ease their restrictive monetary policy stance which could weigh on the greenback. Therefore, given the inverse relationship between the dollar and gold, it could provide support for gold’s price. 

On the flip side, should the Core PCE rates unexpectedly rise, implying persistent or even an acceleration of inflationary pressures in the US economy, it may have the opposite effect, with the dollar strengthening whilst weighing on gold’s price.

In the coming week though we would like to highlight the Fed’s interest rate decision which is set to occur on the 31^st of July in which the majority of market participants are anticipating the Fed to remain on hold with FFF currently implying a 97.5% probability for such a scenario to materialize.

Central Bank Gold reserves to increase?

According to a survey conducted by the World Gold Council (WGC) conducted on the 18  of July, 81% of central bank respondents expected global central bank gold holdings to increase over the next 12 months. The expectations of an increase in gold reserves held by central bank’s may imply that long-term demand for the precious metal may increase, and thus should demand increase it may lead to higher gold prices should demand exceed the supply of the shiny metal.

Gold Technical Analysis

XAUUSD Daily Chart

• Support: 2385 (S1), 2330 (S2), 2275 (S3)
• Resistance: 2420 (R1), 2470 (R2), 2520 (R3)

Gold’s price appears to be moving in an upwards fashion despite its recent drop from its recently formed new all-time high near the $2470 per troy ounce figure. We opt for a bullish outlook for the commodity and supporting our case is the upwards-moving trendline which was incepted on 27  of June.  However, our RSI indicator below our chart currently registers a figure near 50, implying a neutral market sentiment.

Nonetheless, for our bullish outlook to continue, we would require a clear break above the 2420 (R1) resistance line, with the next possible target for the bulls being the 2470 (R2) resistance ceiling. On the flip side, for a neutral outlook, we would require the precious metal’s price to remain confined between the 2385 (S1) support level and the 2420 (R1) resistance line.

Yet given the close proximity of the aforementioned support and resistance levels, should the precious metal’s price form a clear break below the 2385 (S1) support line, we would immediately switch our bullish outlook in favour of a bearish one, with the next possible target for the bears being the 2330 (S2) support base.

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