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Is gold setting up for a rebound after Fed induced weakness?

The following looks to identify key catalysts and themes currently in play for gold, assessing whether recent decline is the start of a broader trend reversal or a knee jerk reaction.

Federal Reserve commentary prompts dollar strength and gold weakness

The sharp rebound in gold since April this year has ended abruptly, following news from a more hawkish Federal Reserve (Fed) who now look to open discussions around tapering stimulus efforts. The Central Bank has also suggested that rates in the world’s largest economy could rise twice before the end of 2023.

While gold was rising on the increasing inflation expectations along with a softening dollar, the Fed commentary has inversed short-term movements whereby the dollar has started to strengthen once again, longer-term US treasury yields are rising and the price of gold is declining.

For now, markets are assessing whether initial movements are part of a knee jerk reaction or longer-term reversal in asset class trends. Fed actions and commentary become even more crucial for gold, with inflation data amongst the most important influencers as it guides the pace of monetary tightening now expected over the medium term.

Gold: technical analysis

The price of gold has corrected all the way back to the 1760 support level. Despite short term weakness, we do consider the medium-term trend for gold to be rangebound in nature.

The price has now formed a bullish price reversal off the 1760 support level. The price reversal is supported by an oversold signal. The reversal suggests a rebound back towards the 1820 level, our initial resistance target. A break of this level would call for a further move higher towards the 1840 resistance level.

The bullish reversal would be deemed to have failed if instead we see renewed decline and a break (close below) of the 1760 support level. In this scenario, the move lower would consider 1720 as the next support target.

IG client sentiment

As of 22 June 2021, the majority of IG clients (86%) with open positions on dollar denominated gold expect the price to rise in the near term, while 14% of clients with open positions expect the price to fall.

Summary

  • Gold has been under significant pressure in the short term having fallen nearly 150 dollars from this year’s highs
  • Short term weakness has been influenced by a more hawkish Fed who are opening discussions around tapering stimulus efforts underway
  • The fall in gold correlates to a rise in US 10-year Treasury yields and the dollar
  • Inflation data will see its importance for gold elevated in lieu of future monetary policy decisions
  • The price of gold remains in a broad trading range over the medium term
  • In the short term, the price of gold is looking oversold at support, suggesting a possible near-term rebound
  • The majority of IG clients with open positions on gold expect the price to rise in the near term

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