Gold has started the week trying to stabilise around the $4,000 level after last week’s 4% drop that saw the metal briefly drop and close below this psychological hurdle. In the first couple of days of this week, gold has so far refused to fall further with traders easing off the gas ahead of this week’s key central bank meetings. The yellow precious metal has also – for now – held above the summer lows of $3942. Silver, meanwhile, has broken its summer lows, with the grey metal now deep inside a long-term support zone between $50 and $55 area. With gold now nearly 30% off its January peak and silver 55% worse off, both metals may be due a bounce soon. In the short-term, we need a bullish trigger to turn the gold forecast bullish. Continued central bank buying and inflation hedging keeps gold’s long-term appeal intact.
Why is gold not bouncing back already?
Gold is being pulled in two directions by inflation. Persistent price pressures should support demand for the metal as a store of value. But if inflation remains sticky enough to keep central banks hawkish, higher nominal and real yields increase the opportunity cost of holding a non-yielding asset such as gold. That’s what has been forcing prices lower in recent months as oil has surged higher again, reviving concerns that interest rates may need to remain restrictive for longer than markets had hoped.
This helps explain why the metal has struggled to sustain its rebounds. For now, investors can still earn relatively attractive returns from government bonds, making it harder for gold to compete despite its longer-term appeal as a hedge against currency debasement. But there is so much pressure yields can apply to gold. In the physical form, demand for gold remains strong as ever…
Central-bank buying provides a longer-term floor
As mentioned, there is another source of demand that is less sensitive to short-term moves in yields. Central-bank buying, particularly from China, continues to provide an important structural underpinning for the market.
The significance of this demand is that it can change the dynamics of a correction. If investors believe official-sector buying will remain strong, they may be more inclined to buy dips through ETFs, spot and futures markets. In that sense, central-bank accumulation could help put a floor under gold even while the near-term macro backdrop remains challenging.
It does not necessarily prevent further downside, but it makes the case for a prolonged bear market less convincing.
Gold still needs to prove sellers are losing control
Gold has found some support in the last couple of days near the $4K level, but the technical picture still remains bearish until a higher high is made. The metal extended its correction last week and has managed just two weekly gains over the past nine weeks. That sort of momentum argues against the idea that XAUUSD has hit a bottom. But I have seen stranger things happen in the past and I wouldn’t be surprised if gold bottoms out here despite the bearish momentum.
Key short-term resistance to watch now is around the $4,075-$4,106 old support area. This zone represents the base of the rally that began in early August. We held here for a while before breaking below it. Now, it could turn into resistance if we get a retest from below. However, if it fails to offer resistance, and gold goes back above this zone, then this will suggest that sellers have lost control.
Another sign of improvement would be a decisive break above the trend line connecting the recent highs.
