Gold Overbought: Tempered Geopolitical Fears, Rising Yields Could Spook the Bulls

  • Commodities Analysis
  • Editors Pick

Gold fell first thing on Monday as the markets priced out some geopolitical risk from the Middle East, with the focus shifting towards a raft of company earnings, including a few of the “Magnificent Seven” tech giants, this week.

Over the next few days, data is also expected to reclaim its position as the primary market influencer. We have US GDP and core PCE figures to look forward in the second half of the week.

A strong set of US data will likely prevent a softening of the US dollar ’s momentum. Gold investors will be wondering whether the metal will finally show some commitment to the downside unlike the past several weeks, when it continually defied gravity by ignoring rising US dollar and yields.

If yields remain supported again this week, I reckon this may exert some pressure on the technically overbought gold, unless investors perceive a risk of US default. Gold's unusual price movement persisted again during much of last week after detaching entirely from the US dollar and bond markets, as yields climbed alongside gold, which is very uncommon.

Investor preference for safe-haven assets and central bank purchases outweighed concerns about rising bond yields, which theoretically should increase the cost of holding non-interest-bearing assets. For instance, the United States 2-Year yield is around 5% currently. By staying invested in gold, investors are foregoing this "risk-free" return from government bonds.

No further escalation in Israel-Iran conflict – for now

With no further escalation in the conflict between Israel and Iran over the weekend, we have seen gold make a negative start to this week’s trading, along with crude oil . European stocks and US index futures were trading higher at the time of writing. However, caution remains prevalent following the recent attacks and nothing can be taken for granted.

In the last few weeks, raised uncertainty in the Middle East has clearly been playing a significant role in gold's resilience. On Friday, risk assets saw a further decline, partially attributed to Israeli strikes in western Iran, prompting a surge in gold and crude oil prices. But European markets recovered on Friday from their overnight lows and have made a positive start to Monday's session thus far, as investors played down the impact of Friday's limited strike.

Focus turns to inflation data and interest rates

As mentioned, gold investors have hardly responded to rising bond yields. Perhaps they are holding gold to hedge against inflation as fiat currencies continue to lose value. Federal Reserve Chairman Jerome Powell last week cautioned that a robust US economy might justify keeping rates at their current levels for an extended period as necessary, emphasising that inflation had exhibited a "lack of progress" towards their objectives. This puts this week’s Core PCE inflation data into a sharp focus.

Following a robust US CPI report that was published a couple of weeks ago, the dollar has been gaining strength, particularly as both US interest rates and those of other major economies like the ECB and the BOC have recently shifted favorably for the greenback.

Furthermore, heightened geopolitical tensions in the Middle East have bolstered the overall bullish sentiment for the US dollar. Should Core PCE data also overshoots expectations then this could further support the dollar and potentially weaken risk assets. Yet, the lingering question persists: will gold finally succumb to pressure from the US dollar?

Gold technical analysis and trade ideas

Gold has been in a phase of consolidation following its recent significant gains over the past week and a bit. Thus far, it has struggled to achieve a daily close above the $2400 mark, which is acting as resistance against its strong bullish momentum. Apart from last Friday's notable inverted hammer candle, there haven't been many bearish signals observed.

Gold Daily Chart

Typically, such a candlestick pattern would suggest a potential near-term peak, but gold's price behaviour has been far from typical. It has completely decoupled from both the US dollar and bond markets. Sellers appear to lack conviction at this stage. From a bearish perspective, a breakdown of key short-term support levels is needed to initiate at least a temporary bearish trend, and the weaker start may be a sign of things to come as we head deeper into today’s session and week.

However, considering gold’s strong bullish trend, any selling pressure may be limited. For me, a short-term downside target is around $2300, which corresponds with a bullish trend line. Further down, more significant support levels start around the $2200 region.

But to get to these levels it will need to break the initial support level of around $2360, coinciding with the 161.8% Fibonacci extension level of a significant price swing from the 2020 high to the 2022 low. This level was being tested at the time of writing. So, let’s see if the bulls will re-emerge here or whether we will see a breakdown this time.

On the upside, Friday’s low at $2372, followed by $2400, and the recent record high at $2431 present the next potential resistance levels. With gold trading near its all-time highs, there are no further obvious prior reference points beyond these levels to monitor.

But gold remains technically overbought on higher time frames like the daily, weekly, and monthly. The weekly RSI is still well above the 70.0 threshold despite easing back a little on the daily time frame, thanks to its recent consolidation. Further consolidation or a pullback is needed to work off the overbought conditions on the higher time frames.

Gold Weekly Chart

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Disclaimer: This article is written for informational purposes only; it does not constitute a solicitation, offer, advice, or recommendation to invest as such it is not intended to incentivize the purchase of assets in any way. I would like to remind you that any type of asset, is evaluated from multiple points of view and is highly risky and therefore, any investment decision and the associated risk remains with the investor.

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