Gold outlook: XAU/USD’s haven appeal recedes

Gold saw a modest recovery in the first half of Monday’s session after a sharp decline on Friday, though the rebound lacked any clear catalyst. With US markets closed for a holiday and a sparse macroeconomic calendar, price action was largely technical. Hovering around the critical $2,900 level, gold’s next move could set the tone for the coming days. Friday’s sharp reversal suggests caution, yet the failure to follow through on the downside hints that dip buyers remain active. The key question is whether the metal will extend its retreat from overstretched levels or push towards the psychological $3,000 mark first. We will need to see some downside follow through before turning tactically bearish on the short-term gold outlook.

Was Friday’s drop a reversal in the trend or just a blip?

Gold’s selloff on Friday came after failing to break the weekly high of $2,942, slipping sharply to a session low of $2,877. In doing so, it breached a key short-term support zone between $2,900 and $2,905, which may now act as resistance. Unless gold manages to reclaim this level on a closing basis, the bears might feel emboldened in the short term, particularly given the formation of a bearish engulfing candle on the daily chart.

Source: TradingView.com

Despite this reversal, the chart of gold remains firmly in an uptrend, consistently printing fresh highs. However, early warning signs of exhaustion are creeping in. How much selling pressure can the bears muster at these levels, if any?

Overbought signals pointed to caution on gold outlook

Gold’s recent surge pushed momentum indicators into extreme territory, with the Relative Strength Index (RSI) flashing overbought conditions across multiple timeframes. Before Friday’s drop, the daily RSI hovered around 78, easing to just under 70 after the decline. Meanwhile, the weekly RSI remains elevated near 75, displaying negative divergence with gold’s price—a sign that momentum could be waning. The monthly RSI, too, sits at a lofty 80, reinforcing the notion that a corrective phase may be imminent.

While these indicators suggest a pullback or consolidation is likely, the lack of immediate follow-through selling has kept bearish bets in check for now. However, traders should remain cautious—Friday’s reversal and stretched technicals serve as a stark reminder that markets don’t rise in a straight line.

What’s driving gold’s volatility?

The US dollar remains at the heart of the gold market’s turbulence. Last week’s hotter-than-expected inflation data initially supported the greenback, but it later softened following Trump’s tempered rhetoric on tariffs, and a softer retail sales print. The euro, meanwhile, found support as he expressed a willingness to broker peace in Ukraine, although the single currency has eased off to trade back below the $1.05 handle today.

Previously, gold was ignoring all the dollar strength and was rallying, breaking the historic negative relationship. Gold’s decoupling from that trend seems to have been the reason why it fell so sharpy on Friday.

With speculation running high, gold may need a correction to shake out froth, particularly if geopolitical risks start to ease. Trump’s stated ambition to resolve conflicts in Ukraine and Gaza could dent safe-haven demand should he succeed. His protectionist policies and aggressive spending plans may also fuel inflationary pressures, delaying rate cut expectations and supporting bond yields.

For now, gold bulls must tread carefully. While the broader trend remains intact, the risk of a deeper pullback cannot be ignored.

-- Written by Fawad Razaqzada, Market Analyst

Follow Fawad on Twitter @Trader_F_R

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