Following Friday’s sharp rebound, which came after an even sharper sell-off the day before, gold initially started Monday’s session trading around the $5,000-per-ounce-level. It rose slightly above that level for a few hours before easing lower as the session wore on, slipping back below $5K at the time of writing, to trade about 1% lower on the session. Precious metals are now consolidating after the recent bout of volatility. However, with the US out and China on holiday for much of the week, it remains to be seen whether there is enough momentum to keep prices supported at these levels. Traders are also still trying to garage whether those big falls at the end of January marked the top for gold. While prices have found dips buyers in the last couple of weeks, they remain well off those extreme highs seen last month. So, we could potentially see some weakness creep back into gold as traders unwind their safe-haven bets, and book profit while pricier are still quite high relative to a just a few months ago. At the stage, though, our gold forecast is neutral.
Gold forecast: Fundamentals losing some shine
From a macro perspective, some of the factors that powered gold higher earlier in the year are starting to lose momentum, although the People’s Bank of China in January continued purchasing gold for the fifteenth consecutive month. But at least some of the bullish narrative centred on US monetary policy uncertainty and expectations of deep rate cuts. That tone shifted after Donald Trump named Kevin Warsh as the next Fed chair – a move markets took as relatively hawkish. Since then we have had mixed US data keeping traders busy guessing the Fed’s next move. Last week, we had a surprisingly strong nonfarm jobs report which was later countered by softer CPI data.
So far, however, the US dollar hasn’t been able to benefit for the slightly hawkish repricing of US interest rates. If, however, we see that change then that could act as a headwind for precious metals.
It is also worth keeping an eye on oil prices which rallied sharply last month, before moderating at the start of this month. But in recent days, WTI has managed to establish a base around the 200 day moving average near $62-$63 area, as the US and Iran continue nuclear talks.
If we see the resumption of the oil rally that began in January, then this should favour the US over energy-importing economies like the eurozone – and the dollar could start to show resilience. That, in turn, should be bad news for gold.
So, does this mean gold will continue heading lower?
From a broader perspective, the recent volatility – including the sudden drop we saw on Thursday – doesn’t automatically mean that gold is about to enter a sustained downtrend. However, it does increase the likelihood of continued volatility in the near term. The market has now cleared out a large pocket of downside liquidity, and the next move will depend on how price behaves around key technical levels.
The main level to watch now is $5,000. If XAUUSD can reclaim that level on a more sustainable fashion than its half-hearted attempts in recent days, then that would be a constructive signal. In that scenario, the market could start targeting the upper end of the range again, with a potential run on stops above $5,100.
On the other hand, if gold stays below that $5K level for a while then the probability of further downside increases as it would discourage bullish traders further in light of the recent volatility. That risk will be amplified by the broader macro backdrop, if US data starts coming in stronger, or the dollar stabilises further, while geopolitical tensions ease. All of these factors will reduce demand for defensive assets, potentially turning the gold forecast bearish.
In terms of support, the $4,900 zone is now the first level to defend by the bulls. A clean break below it could open the door to a move towards $4,785, then $4,700, and potentially even $4,500, which stands out as the key longer-term support level and could come back into focus if selling pressure persists.
With gold prices being all over the place, traders must ensure you have clear targets in mind, trade from level to level and always ensure adequate risk management to avoid any disastrous situations to your account.
-- Written by Fawad Razaqzada, Market Analyst
Follow Fawad on Twitter @Trader_F_R
