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XAU/USD Outlook: Gold Price Tamed on Fundamentals, Hovering Above Key Support

XAU/USD Outlook: Gold Price Tamed on Fundamentals, Hovering Above Key Support

Daniela Sabin Hathorn,
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Key Talking Points:

  • Rising bond yields make gold less attractive as an investment
  • Inflation expectations and a weaker USD keep gold prices supported
  • Current price Hovers above 10-month Fibonacci support
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Gold has been struggling to attract investor demand in the last few sessions as rising Treasury yields are weakening the precious metal’s safe-haven value. Upside momentum seems to remain capped at the moment with sideways consolidation making it hard to see a way out of its current range.

Fundamentally, rising bond yields are damaging gold’s value as an inflation hedge, meaning that many investors are likely bypassing its safe-haven appeal to search for better returns in equities and fixed income. And after Jerome Powell’s second testimony to Congress yesterday we have seen a revival of the reflation trade, with money pilling up again in growth stocks and out of traditional safe-havens like the US Dollar and Gold.

He continues to reiterate that monetary policy is going to stay accommodative in the near future and he doesn’t view inflation as an issue as the economy still has a way to go in its recovery. But his ability to control the bond market is in question, with longer-dated bonds rising sharply whilst short-term treasuries remain capped by the Fed’s easing policies, which is likely to lead to further steepening in the yield curve.

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US 10 Year (orange) vs US2 Year (purple) Treasury Yields

Source: Refinitiv

That said, a softer US Dollar and increasing inflation expectations should keep the price of gold supported whilst rising yields and reflationary trades means investors are shying away from gold as it is doesn’t offer a yield on its investment. This is likely to mean that we may see sideways consolidation continue in the short-term, especially as we see that bulls are not yet giving up on the precious metal, staging an interesting bounce higher every 80 pips lower or so.



Technically, the price of gold is lacking decisive momentum in the short-term, supported by a flat MACD and a stochastic that is pretty much oscillating continuously between the overbought and oversold levels, meaning that we may see an extension of the current downside correction to counteract the push higher seen on Monday.

The question really is whether the 50% Fibonacci retracement level (1,760) from the 1,451 – 2,075 surge will hold an increase in bearish pressure. This area has been key since price broke above it back in July 2020, as it was where the price of gold bounced back after the selloff seen at the end of November. Back then, bearish momentum gathered rather quickly on the back of positive vaccine news, but this time sellers seem to be pacing themselves and gathering momentum along the way, which may be the key to them achieving to break lower this time.

XAU/USD Daily chart

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--- Written by Daniela Sabin Hathorn, Market Analyst

Follow Daniela on Twitter @HathornSabin

DailyFX provides forex news and technical analysis on the trends that influence the global currency markets.