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Gold Price Forecast: Long-Term Technical Picture Remains Constructive for XAU/USD

Gold Price Forecast: Long-Term Technical Picture Remains Constructive for XAU/USD

Daniel Moss, Analyst


What's on this page

Gold, XAU/USD, Federal Reserve, Corporate Taxes, IGCS – Talking Points:

  • A remarkable surge in long-term Treasury yields has notably weighed on gold over the last six months.
  • However, the prospect of increased taxation rates, and the possibility of additional intervention for the Federal Reserve could trigger a recovery in Bullion prices.
  • Double Bottom reversal pattern may ignite a more extensive XAU/USD recovery.
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Gold prices have come under significant pressure in recent weeks, as fiscal stimulus talks, the rapid distribution of coronavirus vaccines, and rising inflation expectations drove yields on US Treasuries to the highest levels since early 2020, and in turn diminished the appeal of the non-yielding asset.

However, President Biden’s proposed tax hikes, in combination with a Federal Reserve that is willing to retain its accommodative approach to monetary policy, could see Bullion recover lost ground in the near term. Biden has suggested that his $2.25 trillion infrastructure package should be paid in part by raising the corporate income tax to 28% and setting a 21% minimum levy on global corporate earnings.

US 3-Month Treasury Bills Daily Chart

Chart prepared by Daniel Moss, created with Tradingview

This could prompt investors to divest from exposed equity positions and direct capital back into the gold market. Moreover, there is also an outside chance that the Fed may begin selling short-term Treasuries and increasing purchases of longer-term maturities – in what is commonly known as “Operation Twist” – due to an overwhelming amount of liquidity depressing rates at the front-end of the curve.

The yield on 3-month T-bills currently sits at 0.02% and actually drifted into negative territory earlier this year. Given the central bank has consistently repeated that it remains a long way from achieving its mandated inflation and employment goals, the distinct tightening of financial conditions due to rising long-term rates may prove intolerable and call policymakers into action.

That being said, it must be noted that the Fed has yet to show any level of concern with the tumult seen in the local bond market. Nevertheless, deteriorating fundamentals in tandem with tightening financial conditions could incite intervention from the central bank and ignite the primary uptrend in gold prices established back in August of 2018.

Gold Price Weekly Chart – 89-EMA Support May Ignite Relief Rally

Chart prepared by Daniel Moss, created with Tradingview

Gold prices have drifted consistently lower since climbing to multi-year highs in August of last year, with the confines of a Descending Channel capping upside potential. However, this Descending Channel appears to be part of a larger Bull Flag continuation pattern, which suggests that the longer-term outlook for Bullion remains skewed to the topside.

Indeed, with the RSI attempting to rebound back above 40, and price constructively positioned above the 89-EMA (1702), a more significant push higher seems likely in the coming weeks.

A weekly close back above the trend-defining 5-EMA (1770) would probably intensify buying pressure and bring channel resistance and January low (1802) into the crosshairs.

However, if range support at 1665-1680 gives way, a swift decline to challenge the 50% Fibonacci (1618) and psychologically pivotal 1600 mark would likely eventuate.

Gold Price Daily Chart – Break Above 1700 to Inspire Recovery?

Chart prepared by Daniel Moss, created with Tradingview

Indeed, zooming into the daily chart reinforces the bullish longer-term outlook depicted on the weekly timeframe, as prices carve out a Double Bottom reversal pattern above key support at 1675.

However, bearish moving average stacking, and both the RSI and MACD tracking firmly below their respective midpoints, suggests that bears are still firmly in control of the commodity.

Nevertheless, a daily close above the 8-EMA (1714) could validate bullish potential and carve a path for price to challenge the Double Bottom neckline at the March high (1755). Breaching that implies that gold could surge to probe the sentiment-defining 144-EMA (1843) in the near term.

Alternatively, slicing through the March low (1676) may pave the way for sellers to drive the anti-fiat asset towards key support at the 50% Fibonacci (1618).

The IG Client Sentiment Report shows 87.11% of traders are net-long with the ratio of traders long to short at 6.76 to 1. The number of traders net-long is 0.02% higher than yesterday and 7.52% higher from last week, while the number of traders net-short is 0.23% lower than yesterday and 30.13% lower from last week.

We typically take a contrarian view to crowd sentiment, and the fact traders are net-long suggests Gold prices may continue to fall.

Traders are further net-long than yesterday and last week, and the combination of current sentiment and recent changes gives us a stronger Gold-bearish contrarian trading bias.

-- Written by Daniel Moss, Analyst for DailyFX

Follow me on Twitter @DanielGMoss

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