Gold forecast: What now for XAU/USD after scoring seventh monthly gain?

• Gold forecast: Can XAU/USD continue rising?
• Dollar in focus ahead of busy week
• China concerns linger
• Gold forecast: technical analysis and trade ideas

 

Gold finished higher for the 7^th consecutive month in August, meaning that the precious metal is now up a solid 21% year-to-date. Will it be able to rise further in September or take a breather? The gold forecast will now depend at least partly on incoming US data and interest rate expectations. I continue to maintain a bullish view on the metal thanks to a favourable macro backdrop and its steady-as-she-goes price action.

 

Gold forecast: Can XAU/USD continue rising?

I expect gold to rise further and continue to attract buying activity on any dips. One reason is that the overall trend remains bullish, which should deter bearish speculators from acting too forcefully unless there are clear signs of a reversal. Additionally, there are few fundamental reasons to short sell gold at the moment. In fact, some argue that gold is still undervalued, considering the significant devaluation and loss of purchasing power of fiat currencies worldwide due to high inflation, which remains persistent in some regions. While disinflation is evident in the US and other areas, it's not the same as deflation. Prices are still increasing, just not as rapidly as before. Demand for gold as an inflation hedge should continue to offer support. Moreover, the sharp decline in bond yields in the last couple of months, driven by expectations of rate cuts by the Federal Reserve, is likely to benefit low or zero-yield assets like gold. As long as we don’t see a reversal in the that trend, lower yields should argue against a sustained period of weakness for gold and silver.

 

Dollar in focus ahead of busy week

 

The US dollar is facing a key test this week with the release of several market moving data releases, including the August jobs report.

 

Following today's US Labor Day holiday, the US data schedule becomes busier, featuring ISM manufacturing data on Tuesday, JOLTS job openings on Wednesday, ADP employment data, jobless claims, and ISM services on Thursday, and culminating with the key event of the week, the August jobs report on Friday.

 

Out of all of these data releases this week, the nonfarm jobs report should be a key determinant of whether the dollar’s two-month dollar bear trend extends or whether range bound price action will return.

 

Gold bulls will need to a weaker number to send the metal sharply higher. But if the consensus is correct regarding Friday's jobs report, which predicts 165,000 job gains and a decrease in the unemployment rate to 4.2% from 4.3%, then the market will likely solidify expectations for a 25-basis point rate cut to start the Fed's easing cycle on September 18. In this scenario, I would expect to see a modest weaker reaction in gold at least.

 

However, if payrolls only increase slightly, say by around 100,000 or so, with the unemployment rate potentially rising too, then in this scenario, the dollar could resume lower, sending gold sharply higher as expectations shift back toward a 50-basis point Fed rate cut in September.

 

China concerns linger

 

Meanwhile we have had some mixed PMI readings from China’s manufacturing sector in the last couple of days, leaving investors guessing about the health of the world’s second largest economy. While the official manufacturing PMI fell further into contraction at 49.1 in August from 49.4 in July, the Caixin PMI improved to 50.4 from 49.8 the month before. Meanwhile, the official non-manufacturing PMI ticked up to 50.3, suggesting that perhaps the Chinese economy may have bottomed out.

 

We will need to see further evidence of a Chinese recovery. If so, this will help raise hopes that elevated demand from the world’s top gold consumer nation can sustain precious metals prices at these levels or even push them higher.

 

Gold forecast: technical analysis and trade ideas

 

Source: TradingView.com

 

The steady grind higher is precisely what the bulls would like to see, keeping the technical gold forecast bullish. Shallow dips, higher highs, higher lows are characteristics of strong bullish trends.

 

So, the trend is clearly bullish and will remain that way until we see a lower low form. Dips are likely to find support around broken levels such as around the old record high from July at $2483, where we also have the 21-day exponential moving average converging. The bullish trend line that has been in place since February, comes in around $2450, representing another short-term support level to watch.

 

On the upside, there is only one prior reference point to watch given that the metal is trading near its all-time high. And that level is the all-time high itself, hit last month at $2531.

 

 

 

-- Written by Fawad Razaqzada, Market Analyst

Follow Fawad on Twitter @Trader_F_R