Gold needs plenty to go right to maintain its bullish momentum

• Gold is $40 away from record highs
• It’s key market drivers – the USD and real bond yields – have fallen sharply this week, providing fuel for the latest leg higher
• After such a strong move, gold needs a lot of things to go right in the near-term

Gold is knocking on the door of record highs heading into what has recently been an extremely strong period for bullion prices. But having rallied so hard since early October, it comes across as being priced for perfection near-term, making the risk of a pullback elevated. For gold bulls, this may actually assist the longevity of the broader move.

Gold bulls getting green lights everywhere

Gold has been in beast-mode since October 5, surging initially on geopolitical tensions in the Middle East before kicking again on sharp falls in US bond yields and US dollar, sending the price surging towards record highs. Over $130 bucks it’s put on over this period, leaving it less than $40 away from the mark. Gold is also entering what’s been a very strong period recently, finishing December higher in each of the past six years for an average gain of just under 4%. To top things off, we’re about to get blasted by oodles of headlines about a golden cross for gold on the daily charts, most of them no doubt using clichés.

Almost everything seems to be working in its favour…

Punchy pullback risk as priced for perfection

Looking at the price action, you could argue gold is looking a stretched. Siting just below levels where rallies have faltered in each of the past three years, and with RSI moving into overbought territory, it’s not hard to see the risk of some form of reversal in the near-term.

With inflation reports from Europe and the US out Thursday, the latter accompanied by volatile jobless claims data, along with numerous central bank speakers, a lot must go right for gold to keep this brisk upside momentum going. Anything that doesn’t go to plan could spark a bout of profit-taking. The US dollar index has already fallen the most in a year in November, much of it in the past few days, while 10-year inflation-adjusted US bond yields have skidded 15 basis points this week alone, bordering on disorderly. As gold’s main drivers, if they were to reverse it would be difficult for bullion to maintain these levels.

Gold has already tested $2048 today, a level where it was capped on all bar one occasion earlier this year. Should it not be able to get a foothold above here later in the session, it could provide an opportunity for shorts to target a modest reversal with a stop loss placed above the level. Minor uptrend resistance located around $2015 would be the initial target with support around $2005 below that. Any pullback beyond that scale would be unlikely in the absence of an abrupt change in the macroeconomic environment.

-- Written by David Scutt

Follow David on Twitter @scutty