Gold analysis: Has gold formed a low?

• Gold analysis: Metals undermined by ‘risk on’ today
• But Israel-Hamas conflict among factors that could keep gold supported
• Gold’s long-term outlook remains bullish

The return of firmer risk appetite meant that safe haven gold would lose some of its shine today. With stocks higher, gold has taken a back seat. But despite being flattish on the session, that weekend gap on gold remains open. In other words, gold is still comfortably higher than Friday’s close. More gains could be on the way for gold for as long as geopolitical risks remain elevated and if the upcoming US macro pointers trigger fresh selling in the dollar, after the greenback ended a run of 11 consecutive weekly gains last week.

Gold undermined by ‘risk on’ today

Gold found further support in the second half of Monday’s session, after initially gapping higher on the back of the unfortunate events over the weekend which had triggered a “risk off” response in the markets. Though geopolitical risks haven’t subsided, gold has eased back a little today, in part because of the rebound in global bond yields. With stocks also trading higher, it is obvious the market’s focus has moved on a little.

Israel-Hamas conflict could keep gold supported

While gold may not be shining so brightly so far today, it could easily find renewed strength as the situation in the Middle East remains intense. Investors are worried that the retaliation by Israel is going to be – as it has already – severe and will raise the tensions between Israel and many other countries around the region, including, of course, Iran. This is why oil prices have remained elevated. Gold typically rises when there is heightened geopolitical risks.

Have bond yields and US dollar peaked?

There is a possibility that bond yields may be peaked, with the Fed’s hawkish repricing near completion. The stronger-than-expected US jobs report on Friday failed to deliver any more dollar strength and with the greenback falling further so far this week, the possibility that the dollar may have formed a top is undoubtedly something that many investors are wondering about. If we see a similar response to this week’s upcoming data (FOMC minutes, CPI and UoM consumer Sentiment survey, among other things), then this will further fuel speculation that the worst is over gold.

How about gold’s long-term outlook?

Gold’s sharp $130 (6.7%) drop in the space of a couple of weeks (from its 21^st September high) means prices were probably due a short covering rally anyway. So, some of the bullish price action since Friday could be just that – a short-covering bounce. Therefore, one should not get too carried away by the recent bullish price action.

Regardless of the short-term price action, to me there are no questions about gold’s long-term bullish outlook.

The fundamentals remain supportive for gold in the long-term outlook, given, for example, how much inflation has further devalued fiat currencies since the start of the year. That’s when gold last staged a big rally. In that regard, the metal should be shining more brightly anyway, if it truly is as an effective inflation hedge. The fact that it hasn’t, this has been almost entirely because of the big falls in government bond prices, lifting their yields to multi-year highs and thereby increasing the opportunity cost of holding the non-interest-bearing commodity.

But much of the Fed’s hawkish repricing of interest rates are now done, meaning that the downside for bonds and, by extension, gold should be limited moving forward. That’s not to say gold will necessarily find a bottom imminently. But equally, we are now not too far either, I believe. So, be on the lookout for more bullish signals to emerge from here on.

Gold’s weekend gap still unfilled

Bringing the focus back to the short-term, the fact that XAUUSD has not returned to Friday’s closing prices must be making it uncomfortable to trade gold, as usually gaps tend to fill in highly liquid assets. However, this is not always the case. I recall a gap on the EUR/USD a few years ago that remained unfilled for several months. While a gap-fill would make things a bit more comfortable, gold can simply grind higher for a while, especially if the dollar selling gathers pace. So, watch out for that possibility.

One way to look for new trades while the gap remains open is to zoom in on the smaller time frames like the hourly, wait for a bit of consolidation and then look for long setups once price breaks higher, or about to. You can use short-term price structures as your invalidation levels.

Obviously a much better scenario would be for gold to fills its gap and then create fresh bullish signals to trigger another rally. That could still happen, and the trigger could be the upcoming US data releases that will undoubtedly move the dollar and bond yields in the direction of the surprise.

Gold analysis: key technical levels to watch

Source: TradingView.com

At the time of writing, gold was testing the first key short-term resistance level around $1857, where it had started to drift lower from. The slight weakness is hardly a surprise given the sharp two-day rally. While a bit of a move lower from here is understandable, the fact that support in the long-term area around $1805 to $1820 held last week, before the flare up of geopolitical risks, this could be a sign that the metal may have formed a low.

The next level of potential resistance is seen around $1885, followed by $1900, with the latter being the base of the previous breakdown. On the downside, the next potential support level is Friday’s high at $1835. 

Gold analysis video

In case you missed my previous analysis video on gold, you can watch it again here:

-- Written by Fawad Razaqzada, Market Analyst

Follow Fawad on Twitter @Trader_F_R

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