Gold analysis: Metal extends drop to test key support

• Gold analysis: Will recent drop in bond yields support gold prices?
• Key data from US and China to come
• Gold technical analysis

Markets have been very quiet in the last couple of days, with the lack of any major data causing stocks to drift higher, extending their recent trend, while the dollar has drifted back higher following last week’s data-driven sell-off. As a result, gold and silver have weakened so far this week. But are we now going to see a recovery? Will the dollar resume lower amid the peak US interest rates narrative? Attention will be on Federal Reserve chair Jerome Powell, who is due to speak, as well as US jobless claims data.

Gold analysis: Will recent drop in bond yields support gold prices?

Precious metal bulls must be frustrated by signs of weakening prices in recent weeks, following gold's notable 7% increase in October and silver's comparatively modest 3% rise. Gold's upward trajectory last month was primarily attributed to the surge in demand for safe-haven assets, prompted by the escalation of the Middle East conflict, leading investors to shift away from riskier investments. Despite a surge in US bond yields to their highest point since 2007, gold managed to rally. However, although bond yields have since sharply decreased at the beginning of this month, this has not yet positively impacted gold prices.

Investors seem to have favoured stocks and bonds over gold due to the latter's lack of dividends or interest and the associated costs of storage. Moreover, with global signs of peaking inflation and gold prices hovering close to their all-time highs, some investors have been hesitant to purchase gold at recent levels, opting to wait for a more substantial price decline before making a move. Nevertheless, with the decline in yields, potential buyers are keeping an eye out for opportunities to make a move.

Yields could move further lower in the event upcoming US data on the economic calendar disappoint expectations. On Friday, we have UoM’s consumer sentiment survey to look forward to. Next week, we have US retail sales and more importantly, inflation data on Tuesday. For two consecutive months now, US inflation has surprised to the upside. In September, annual CPI remained unchanged at 3.7%, defying market expectations of a slight decrease following an even larger surprise the month before. But if we see a larger-than-expected drop in CPI this time, then it will further boost the “peak interest rates” narrative and potentially hurt the dollar and underpin gold.

It is also important to monitor economic indicators from China, the world’s largest gold consumer. As well as industrial production we will have retail sales data to look forward to in the early hours of Wednesday from the world’s second largest economy. Recent Chinese macro pointers have shown some improvement. We will need to see more evidence of a turnaround for yuan and local stocks to recover more meaningfully. Gold should also benefit from any positive surprise in Chinese data.

Therefore, it's crucial to remain vigilant for a potential bullish reversal as both gold and silver approach critical support levels. In my opinion, silver exhibits greater potential for further upside compared to gold at this juncture, given the fact that the gold-silver ratio as started to decline again from a key resistance zone circa 87.25 to 88.00 area.

That said, gold, too, could be on the verge of a rebound, as it tests a key support area here…

Gold technical analysis

Source: TradingView.com

As per the highlighted region on my chart, XAUUSD is now testing a pivotal area between $1931 and $1947. This particular price range had previously exhibited a tendency to act as resistance during multiple instances observed between the months of August and September.

Following the recent breakthrough above this critical range, the bulls would feel it is imperative for gold to find renewed buying momentum from within this specific zone. If they turn up here, we may see a renewed push towards $2000 again. So far, however, there were no signs of the bulls as I wrote this.

Adding further significance to the above range is the 200-day average, which also comes into play here. This is thereby lending additional weight to the importance of this critical area.

Therefore, a potential breach below that $1931-$1947 area, especially if sustained on a daily closing basis, would signify a bearish turn of events, warranting a vigilant assessment of the market's trajectory for the bulls. But we will cross that bridge if we get there. For now, the onus is on the bulls - let’s see if they will show up here.

-- Written by Fawad Razaqzada, Market Analyst

Follow Fawad on Twitter @Trader_F_R