Gold analysis: precious metals extend rally on Middle East jitters

• Gold analysis: Metal has been boosted on haven flows recently
• Slightly dovish Powell remarks weighed on USD and yields
• But still-high bond yields and dollar pose threat to gold’s rally

Precious metals have stood out in the past two weeks and today saw gold hit levels last seen in May and silver reached its best level since September. The yellow metal was about $7 shy of the $2K mark at the time of writing. With gold breaking above the July high of $1987, the key question is can it hold above here, or do we quickly go back below it?

Gold analysis: Metal has been boosted on haven flows recently

Gold has been strengthened primarily by safe haven flows in the last two weeks amid the geopolitical tensions in the Middle East. Powell’s slightly dovish speech has also weighed on the US dollar slightly, further underpinning the metals and causing bond yields to fall back. The 10-year US Treasury yield almost hit 5% earlier but has since drifted lower. The two-year yield was on track to fall for two consecutive days at the time of writing.

But questions remain over the direction of bond yields. It is too early to call the top for yields. If they simply consolidate around the current levels, this would still represent a big opportunity cost for holding onto assets that don’t pay any interest or dividends like gold. The precious metal could go tumbling lower again in the event of de-escalation in the Middle East situation. A potential trigger for this reversal might be a potential ceasefire between Israel and Hamas. The recent surge in gold appears to largely reflect an anticipation of a severe escalation in the regional crisis. If, by some stroke of luck, that does not transpire, gold could face a rapid downward reversal.

So, it wouldn’t take much to push gold back down. But for now, price action is telling us that there is strong bullish momentum behind the gold rally. As traders, we must respect that and await a key reversal pattern before potentially looking for bearish trades.

Gold technical analysis

Source: TradingView.com

What’s more, gold is looking increasingly 'overbought' in the short-term perspective. So, even the bulls would like to observe a period of consolidation and some retracement. This would help assess whether buyers will step in to defend the breached resistance levels or not.

Gold has now reached a potential resistance zone between $1978 and $2000sih.  This zone posed significant challenges for the metal during the summer months. Observing whether sellers re-emerge at this juncture or if the zone is surpassed smoothly will be crucial.

The key support currently lies at around $1930, where the 200-day average comes into play, and $1950, which was previously resistance.  For as long as gold now manages to hold above this area, the path of least resistance would remain to the upside. However, a conclusive break below this area would be perceived as bearish.

With everything going on in the Middle East, gold is rightly behaving how it should be and finding strong demand. Moving forward, though, gold's momentum may decelerate as ‘overbought’ conditions and the influence of still-high bond yields might outweigh the impact of safe-haven demand that it is currently enjoying. Still, a bearish reversal pattern must be observed on the daily time frame before we turn bearish on gold.

-- Written by Fawad Razaqzada, Market Analyst

Follow Fawad on Twitter @Trader_F_R

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