Gold has been attempting to stabilise today after its sharpest sell-off in months, with a gain of more than 1% at the time of writing. However, I remain doubtful we have seen a bottom. Yes, the US dollar has eased a bit and the reversal in Treasury yields are also helping. But while the immediate pressure has eased, I would be reluctant to interpret today’s gains as a clear signal that the correction is over. For now, at least, my near-term gold outlook remains modestly bearish, even if I have a strong long-term bullish bias towards gold and especially silver.
Fed expectations are still a major headwind for gold
This week’s hotter-than-expected US inflation data means the Fed will have to hike again and maintain a hawkish bias for a while, especially if oil prices continue to push higher from here on.
The good news for precious metals is that for now yields have fallen back sharply from their post-CPI highs, while the dollar has also surrendered much of its advance. That has given gold some breathing room and explains why the metal has been able to rebound despite continued weakness in technology stocks.
But don’t be surprised if the sellers return as clearly confidence among bullish investors have taken a hit following the sell-off on Wednesday.
Central bank buying cushions the downside
Part of the reason why we haven’t seen a more meaningful drop in gold in recent weeks despite the prior strong dollar rally and elevated yields is to do with central banks, which continue to accumulate gold. That steady demand goes some way to explaining why the metal has held support rather than breaking down. It is not, however, a guarantee of a recovery.
Price action in recent sessions has been heavy, and gold has been unable to break its bearish trend. Central bank demand appears to be slowing the decline rather than reversing it.
Gold still needs to confirm a low
What I am waiting for is confirmation that gold has formed a low, and so far that trigger has not come. The metal has tried to hold key support around $4,100, but the resistance zone overhead has held firm. I would need to see a move above that zone before turning bullish at current levels. Thus, the technical gold outlook still hangs in the balance.
Support comes in around $4,070 to $4,100, where the early August rally began, and gold has bounced from that area a couple of times already.
Resistance meanwhile sits between $4170 to $7185. A move above that would bring the next band of resistance between $4,223 and around $4,285ish, a zone that has held on several occasions.
A break above that would make the picture considerably more constructive. As things stand, though, I can't rule out a dip below $4,000 and potentially the summer low of $3,942.
Frequently Asked Questions
Why has gold been holding relatively despite a stronger dollar? Gold has not broken its summer lows even as major FX pairs such as the EUR/USD have fallen to one-year lows. Part of the reason is that central banks continue to accumulate gold.
Where is key support for gold? Support comes in around $4,070 to $4,100, where the early August rally began. Gold has bounced from that area a couple of times already.
Could gold fall below $4,000? It can't be ruled out. Gold could dip below the $4,000 level and take out its summer low before potentially reclaiming that level to create a bullish signal.
