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Gold Price Forecast: Major Drop in Sight as XAU/USD Tests Key Support

Gold Price Forecast: Major Drop in Sight as XAU/USD Tests Key Support

Richard Snow, Analyst

Gold (XAU/USD) Analysis

  • Aggressive monetary policy continues to hamper gold
  • Recession concerns and lower US treasury yields to support gold in the short-term?
  • Gold (XAU/USD) tests key support
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Aggressive Monetary Policy Continues to Hamper Gold

Gold has taken a back seat since its sensational rise during the period of expansionary monetary policy in response to the global shutdown. This was a time of low, and in some cases negative interest rates, alongside mass liquidity injections (QE) and stimulus checks. In such environments, gold - a non-interest yielding asset - tends to thrive as other traditional interest-bearing investment options offer very little return on investment and even negative real returns.

The current macroeconomic landscape is way different now as global central banks reverse prior stimulatory policies in an attempt to calm surging inflation. Higher interest rates reduce gold’s allure as interest bearing investments and other alternatives start to become attractive once more.

Recession Concerns and Lower Treasury Yields to Provide Short-Term Support for Gold?

US treasury yields and real yields, measured using the 5-year breakeven inflation rate, have dipped recently which may support falling gold prices for now. A lower breakeven rate assumes lower future inflation and less aggressive tightening, perhaps even looser monetary policy. Lower anticipated inflation attracts lower interest rate assumptions, which may offer support for gold.

Fed’s 5-Year Breakeven Inflation Rate

Gold Price Forecast: Major Drop in Sight as XAU/USD Tests Key Support

Source: Fred

XAU/USD Key Technical Levels

Since we are at a potentially defining point for gold, I have turned to the weekly chart to assess downside risks consistent with the current bearish trend. The psychological level of $1800 holds gold prices at bay for now but a breakdown of the level with subsequent momentum places $1774 and $1760 as the next levels of support.

$1774 is a level that witnessed a significant amount of support in 2021 – acting as a pivot point – and appears near the 23.6% Fib of the big 2020 move at $1769. The larger zone of resistance holding up gold prices for most of 2021 is shown as the red rectangle with the midpoint of $1760.

Gold (XAU/USD) Weekly Chart

Gold Price Forecast: Major Drop in Sight as XAU/USD Tests Key Support

Source: TradingView, prepared by Richard Snow

On the daily chart, resistance appears at the 38.2% Fib ($1827.50) before $1854 comes into play. However, current market posture favors the bearish trend with a breakdown of $1800 to be monitored closely for signs of follow through.

Gold (XAU/USD) Daily Chart

Gold Price Forecast: Major Drop in Sight as XAU/USD Tests Key Support

Source: TradingView, prepared by Richard Snow

Gold ETF Outflows Accelerate

Gold investors via the world’s largest physically held gold ETF (GLD), witnessed outflows of around $1.12 billion after witnessing redemptions of $859 million the week before.

Gold ETF (SPDR GLD) Daily Flows

Gold Price Forecast: Major Drop in Sight as XAU/USD Tests Key Support

Source: ETF.com

--- Written by Richard Snow for DailyFX.com

Contact and follow Richard on Twitter: @RichardSnowFX

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

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