Gold may resume lower after tech bounce
Gold was able to stage a mild rebound along with the major European indices this morning following their recent declines. The rebound was probably driven by traders buying back their short trades they undoubtedly established in the last several days. But as gold bounces back to test former support levels, the selling pressure could resume again, given a weak macro backdrop and the fact that the directional bias has been to the downside in recent days.
At the time of writing, the US dollar index was pressing higher again, as the EUR/USD dipped to near the 1.07 handle and GBP/USD remained well below 1.25 following dovish remarks by the BoE governor. With the dollar looking to extend its advance, gold could easily break lower again. So, watch out below.
Gold outlook dented by high yields
With bond yields still very high, the opportunity cost of holding gold, an asset that doesn’t pay any interest or dividends, is the interest you would forgo by not holding government debt. For large institutional investors, investing in government bonds has been a more attractive proposition than gold. This will be the case until such a time when we have gone beyond the point of peak interest rates and closer to when central banks will start cutting rates again. In the meantime, it is difficult to be too bullish on gold.
Indeed, we saw bond yields pressed higher in the aftermath of a strong ISM PMI report on Wednesday, which also sent the dollar sharply higher across the board and pressurised gold. Those moves have reversed somewhat, with yields dipping slightly and gold rising as a result. But it remains to be seen whether there will be any momentum behind the recovery in bond and gold prices.
With government bonds offering high yields, many investors are finding it difficult to justify holding non-interest-bearing assets like gold or low-dividend-yielding assets like growth stocks given their stretched valuations.
The “higher for longer” narrative got another boost as crude oil surged higher this week after Saudi extended its supply cuts through to the end of the year. There are concerns that rising oil prices could give rise to another round of inflation and keep bond yields underpinned as a result. That in turn could hurt gold and growth stocks.
What else is weighing on gold?
There appears to be two major sources of concerns for investors right now: Weak growth in the eurozone and China, and interest rates remaining higher for longer in the U.S. On the latter front, see the nots above. On the former front, we saw further evidence of a deteriorating Eurozone and Chinese economies with the release of the latest macro data. So, demand concerns are an additional factor weighing on gold, although probably more so on silver and base metals than the yellow metal.
Gold technical analysis
With silver already on the way down, and several major FX pairs hitting multi-month lows today, I wouldn’t be surprised to see gold follow suit and break lower from here. From a technical standpoint, the precious metal has struggled to find fresh buying momentum ever since peaking above, then quickly going back below, its bearish trend line on Friday. Gold formed a doji candle on Friday to print a key bearish signal and the metal hasn’t looked back since. Today’s rebound off the 200-day average looks to be driven by technical buying than any real shift in sentiment. Thus, a continuation lower looks more likely, with the bears eying $1900 as a possible target, ahead of the August low at $1885 next. Things will turn positive if we see a daily close above the trend line at some point this or next week. For that to happen, the bullish trend for the dollar or bond yields will need to be arrested. Both appear unlikely for now.
By Fawad Razaqzada on behalf of FOREX.com
At the time of writing, the US dollar index was pressing higher again, as the EUR/USD dipped to near the 1.07 handle and GBP/USD remained well below 1.25 following dovish remarks by the BoE governor. With the dollar looking to extend its advance, gold could easily break lower again. So, watch out below.
Gold outlook dented by high yields
With bond yields still very high, the opportunity cost of holding gold, an asset that doesn’t pay any interest or dividends, is the interest you would forgo by not holding government debt. For large institutional investors, investing in government bonds has been a more attractive proposition than gold. This will be the case until such a time when we have gone beyond the point of peak interest rates and closer to when central banks will start cutting rates again. In the meantime, it is difficult to be too bullish on gold.
Indeed, we saw bond yields pressed higher in the aftermath of a strong ISM PMI report on Wednesday, which also sent the dollar sharply higher across the board and pressurised gold. Those moves have reversed somewhat, with yields dipping slightly and gold rising as a result. But it remains to be seen whether there will be any momentum behind the recovery in bond and gold prices.
With government bonds offering high yields, many investors are finding it difficult to justify holding non-interest-bearing assets like gold or low-dividend-yielding assets like growth stocks given their stretched valuations.
The “higher for longer” narrative got another boost as crude oil surged higher this week after Saudi extended its supply cuts through to the end of the year. There are concerns that rising oil prices could give rise to another round of inflation and keep bond yields underpinned as a result. That in turn could hurt gold and growth stocks.
What else is weighing on gold?
There appears to be two major sources of concerns for investors right now: Weak growth in the eurozone and China, and interest rates remaining higher for longer in the U.S. On the latter front, see the nots above. On the former front, we saw further evidence of a deteriorating Eurozone and Chinese economies with the release of the latest macro data. So, demand concerns are an additional factor weighing on gold, although probably more so on silver and base metals than the yellow metal.
Gold technical analysis
With silver already on the way down, and several major FX pairs hitting multi-month lows today, I wouldn’t be surprised to see gold follow suit and break lower from here. From a technical standpoint, the precious metal has struggled to find fresh buying momentum ever since peaking above, then quickly going back below, its bearish trend line on Friday. Gold formed a doji candle on Friday to print a key bearish signal and the metal hasn’t looked back since. Today’s rebound off the 200-day average looks to be driven by technical buying than any real shift in sentiment. Thus, a continuation lower looks more likely, with the bears eying $1900 as a possible target, ahead of the August low at $1885 next. Things will turn positive if we see a daily close above the trend line at some point this or next week. For that to happen, the bullish trend for the dollar or bond yields will need to be arrested. Both appear unlikely for now.
By Fawad Razaqzada on behalf of FOREX.com
Disclaimer
The information and publications are not meant to be, and do not constitute, financial, investment, trading, or other types of advice or recommendations supplied or endorsed by TradingView. Read more in the Terms of Use.