Gold forecast: XAU/USD struggles as dollar debasement narrative fades

Gold prices weakened (-0.5%) by mid-day in London, while silver (-2.3%) gave back all of yesterday’s gains, and copper (-3%) took the brunt of the sell-off with an even sharper drop. It is hardly surprising to see the metals struggle in this macro environment. Bond yields continue to push higher alongside oil, while the dollar is beginning to regain some ground ahead of the latest inflation data. The market appears increasingly willing to put the so-called “dollar debasement” trade to one side, allowing the greenback to respond more conventionally to higher yields, firmer oil prices and incoming economic data. In other words, the macro environment should arguably be supportive of the dollar were it not for the persistent debasement narrative weighing on the greenback. Put another way, this is hardly a positive environment for precious metals. The near-term gold forecast is thus titled to the downside.

 

Dollar finds renewed support

 

After struggling to get going post the jobs report on Friday, the dollar remained downbeat in the early parts of this week. But late in the day yesterday, it rebounded followed the US Treasury’s announcement that it would buy back $6bn of long-dated government bonds — three times the amount announced in August.

 

The bond market’s initial reaction suggested investors had been positioned for a larger operation. Yet the announcement ultimately helped the dollar recover, as some of the risk premium associated with expectations of more aggressive Treasury intervention was unwound.

 

That is unlikely to put the broader debasement narrative to rest. Investors remain sensitive to the prospect of fiscal and monetary policy contributing to a weaker currency over time. But yesterday’s announcement may nevertheless mark a small shift in the dollar’s trading environment, allowing it to respond more conventionally to the external drivers that would normally support it. If that is the case, then this should be a negative development for gold, silver, and Bitcoin.

 

Watch oil prices

 

Today, Brent oil futures rallied further above the $100 level and that kept investor sentiment cautious. Higher oil prices and weaker equity markets have historically provided a more favourable backdrop for the dollar. And judging by gold’s reaction, it looks like precious metals traders are once again treating the metals as risk assets rather than alternatives to USD. So, any further gains for oil could negatively impact precious metals, rather than provide reason to rotate away from USD to gold.

 

Key inflation data coming up

 

The immediate focus is on August US PPI inflation, which could carry more weight than usual given its position ahead of tomorrow’s CPI report and next week’s FOMC meeting. Consensus looks for headline PPI to rise 0.4% month on month, with core PPI increasing 0.3%.

 

Overall, I don’t think inflation data will challenge expectations of a September rate increase much, as forward-looking investors will reason that higher oil prices should re-ignite inflationary pressures if it hasn’t already done so. Thus, past inflation data is likely to be less important if they turn out to be in line or slightly weaker. But if inflation was already hotter than expected, then this will likely cement rate hike expectations fully, and provide support for the dollar.

 

Technical gold forecast and key levels to watch

 

Gold has made a lower low recently below $4,324. We can now also see around 6 lower highs too since gold peaked earlier this year, with the most recent being around $4,696.

 

 

The recent bounce has seen gold climb a little, but unable to break any meaningful levels yet. The lack of a more meaningful bounce therefore suggests traders are happy to sit on the offer near resistance and are less willing to hold onto long trades. This makes sense with the metal now below the 200-day average, and the challenging macro backdrop highlighted above. A break below $4,324 could potentially pave the way for a larger decline towards the base of the previous breakout around $4100 area.

 

Silver faces a deeper correction

 

Silver, meanwhile, looks increasingly vulnerable to a more meaningful decline after struggling to sustain momentum around the $68 area. The metal had already encountered resistance near $70, where it printed that large bearish engulfing candle on August 28. In hindsight, that could prove to have been an important turning point.

 

 

There are several potential support levels further down, as highlighted on the chart. But for now, the technical picture does not suggest that dip-buyers are likely to step in aggressively. Unless the macro backdrop improves, I can’t see silver quickly reclaiming lost ground. So, the risk appears tilted towards a deeper correction rather than another immediate attempt at the recent highs.