It has been an interesting month for gold, starting on a shaking footing following that BIG plunge at the end of January, which inevitably prompted talk that the rally has run its course. Interesting, the first day of the month also happened to be the low, and so judging by price action alone this month, and not to mention the lack of significantly bearish drivers, the path of least resistance remains to the upside. Much of the drivers supporting gold in recent times, continue to remain in place. For the reason, our gold forecast heading into the month of March still leans positive.
Central bank demand and geopolitics providing floor
If there is one enduring pillar for the gold forecast, it is central bank demand. For a number of years now, they have been accumulating gold into their reserves, particularly across emerging markets as efforts to diversify away from the US dollar have accelerated. Central banks from China to Poland have all been adding aggressively and while the pace of buying has slowed for some central banks, they have nevertheless continued to accumulate gold reserves, with central banks largely being price insensitive. They are not chasing short-term rallies nor panicking on dips, it seems. As long as geopolitical tensions persist and trust in the neutrality of reserve assets remains strained, it is difficult to envisage a sudden collapse in central bank buying.
And at present, the global backdrop provides plenty of it. Renewed tensions in the Middle East, trade frictions, tariff threats and unpredictable policy shifts are all contributing to a more fragile investment climate. The recent trouble in tech stocks amid ‘AI scare trade’ have also contributed positively to the bullish gold forecast. In such an environment, gold’s role as a portfolio hedge comes back into focus.
What about the Fed and monetary policy?
Well, bond yields have been going lower and despite the hotter PPI inflation data release today, this hasn’t caused any reversal in the bond market recovery. The markets remain convinced that the Fed will cut rates further, possibly in July. Even a gradual rate-cutting cycle would be better than no cuts at all, as lower policy rates typically compress real yields and reduce the opportunity cost of holding a non-yielding asset such as gold.
Technical gold forecast: The path higher won’t be straight
If there was one lesson that traders should have learnt in the past 4 or 5 weeks is that gold is no longer going up in a straight line. It has become a two-way trade. At elevated price levels, the market psyche changes where traders may not feel comfortable holding XAUUSD for long periods. Key levels to watch on the downside include $5200, the first line of defence now for the bulls following the breakout from the triangle consolidation pattern. Below that $5100 is the next key level, a major resistance-turned-support level. Then you have the psychological $5K hurdle. Bearish if we go below that in the coming days. On the upside, the 78.6% Fibonacci retracement level at $5342 is sandwiched between resistances at $5290 and $5380.
-- Written by Fawad Razaqzada, Market Analyst
Follow Fawad on Twitter @Trader_F_R
