Gold fell along with silver, base metals and commodity dollars in the first half Tuesday’s session. The precious metal remains undermined for now for various reasons, although there is little doubt in my mind that the longer-term gold forecast remains positive, owing to the fact global monetary policy can only start to loosen from here. Indeed, with the latest manufacturing PMI data from Europe highlighting growth concerns, the “higher for longer” interest rates narrative may soon become a thing of the past.
Why has gold been falling?
In short, because of a rebounding US dollar, putting pressure on all buck-denominated metals. We have also seen bond yields rise noticeably in recent days, reducing the appeal of zero-yielding assets like gold and silver.
Today we saw US bonds come under pressure again, falling for the eighth consecutive session. This helped to underpin their yields, providing support to the dollar and undermining precious metals.
Weak manufacturing PMIs underscore growth concerns
In recent weeks, we have been seeing growing signs of a slowdown in Chinese economic activity, while various indicators from Europe have also started to weaken. There was more evidence that the global recovery is losing momentum today, as the closely watched manufacturing PMIs out of Europe all disappointed expectations, although the services PMIs once again beat. With concerns over China continuing to rise, investors paid more attention to those weaker manufacturing numbers, causing base metal prices like iron ore and copper to drop further lower. Commodity dollars sold off along with European currencies, in the first half of Tuesday’s session.
Debt ceiling deal gets closer
House Speaker Kevin McCarthy said he has had a “productive” talk with President Joe Biden on the debt limit. Judging by the positive vibes coming out of both sides, it looks like a deal to avert a default might be clinched in the last minute. This is why we have seen some US stocks indices rising to fresh multi-month highs in recent days. It could be that because of the performance of the stock markets, gold has not been able to find much love, having outshined earlier in the year.
Gold forecast: Technical analysis
The short-term price action on gold continues frustrate the bulls ever since it failed to hold its break out to a new record high earlier this month. Every time it has printed some bullish-looking candle, like the one on Friday, traders are happy to sell into it. This is because of rising bond yields amid hawkish Fed commentary.
Unless the macro backdrop improves in favour of gold or against the dollar, gold is likely to remain under pressure. That being said, the long-term trend is bullish, and gold is now testing the first of the two key support levels I have highlighted on my XAUUSD chart, where it could easily bounce back from.
The first level is just below $1960, which was the high it had created back in February. Once resistance, this level turned into support on Friday. Let’s see if it will hold again, or break lower this time.
If it holds, then we will still need to see a move above $1980 resistance to tip the balance back in the bulls’ favour. In this event, we would become more confident in providing a more positive gold forecast.
However, if gold breaks cleanly below $1960, then this would keep the short-term bearish bias intact. In this case, gold could drop to the next potential support area around $1925, which is where the long-term bullish trend line comes into play.
Given that the short-term trend has been bearish, any positive reactions we get from the above levels should be treated as just a tradable bounce, as gold could easily turn and break lower again. Until such a time we have a clear bullish reversal signal, the bulls should proceed with extra care.
-- Written by Fawad Razaqzada, Market Analyst