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Gold price outlook – where now after the pullback from ten-year highs?

Gold has gone through several months of weakness after the strong gains of early summer. But is that about to change as real yields struggle to hold recent gains?

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Gold’s rollercoaster year

Even with the current drop from the August highs, 2020 has been a stellar year for gold. Indeed, it has been a spectacular two and a half years, as the price remains firmly in the uptrend from the August 2018 low.

As we look ahead though, can the metal sustain these gains, or are we due a bigger reversal as investors look to buy into cheap stocks that are poised to benefit from an earlier than expected reopening of the global economy?

Weaker dollar to drive gold higher

A falling US dollar has been one of the chief catalysts for gold’s rally this year. While we saw the greenback enjoy gains during the Covid-19 sell-off earlier in the year, co-ordinated central bank action helped buoy risk appetite, with the Federal Reserve's (Fed) actions having the effect of driving down the dollar. The dollar’s fall provided room for gold’s longer-term rally to take off once more.

As we look ahead into 2021 and beyond there seems little likelihood of a longer-term rally in the greenback, thanks to the currently-immutable nature of Fed policy, and while there will be rebounds along the way the general weakness in the greenback is expected to continue.

Inflation expectations still weak

Despite all forecasts to the contrary, inflation has remained stubbornly low in recent years. Inflation expectations have been solidly in the 1% - 3% range for many years, a tribute to the effectiveness of Fed policy.

Admittedly, expectations have picked up recently, and have been given a further lift by vaccine news that points to an earlier than expected recovery in the global economy, but even with this change expectations still remain muted. This presents one challenge for a further ascent in the gold price from current levels.

Falling real yields provide a catalyst for further gains

While gold does not pay an income, the fact that bond yields are getting smaller and smaller, and in many cases going negative, helps to offset gold’s lack of yield, making the metal more attractive on a relative basis. The US has seen its yields move further into negative territory this year, joining Germany and others, which hints at more dollar weakness, and provides another tailwind for gold.

While gold looked overextended in the late summer as it hit a ten-year high, the recent pullback has helped to take some of the froth off the price. There has been a rush in recent weeks to assume that the longer-term trends of falling yields and a weaker dollar are nearing their end, and should these assumptions prove incorrect gold may find the catalyst to move higher, one that it has been searching for in recent weeks as it attempts to rally from $1860

Gold price technical analysis

As noted above the recent pullback in gold from the August high has yet to break the uptrend in place since August 2018. Nearly four months of weakness have helped to reduce bullish sentiment, as the price goes through its most sustained period of weakness since the August-December 2019 drop.

As the factors mentioned above take effect, we may finally see a rebound in the price itself. From a chart perspective, the catalyst will be a move back above $1950 – gold was doing well in this regard before the vaccine news negated these gains. As the impact of vaccine news begins to diminish for now gold may once again have space to rally. Crucially, the uptrend of the past two years and more is so strong that even a deeper push towards $1800 does not necessarily suggest a change in trend is at hand.

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