Gold outlook still positive despite slow start

• Gold outlook: Long-term view remains bullish
• Dollar and yields dip as investors ponder over mixed data ahead of CPI
• Gold technical outlook – bullish trend still intact despite weaker start to 2024

Gold fell out of favour after staging a modest bounce post NFP on Friday. This morning, it briefly fell below $2020 to reach its lowest level since December 18. The precious metal therefore remains contained within its prior ranges, unable to find much love due to the recent recovery of the dollar. However, with the lack of any major US data until Thursday’s release of US CPI, there is a possibility we could see the dollar come under pressure again given that it has reached key resistance levels against a number of major currency pairs. The US 10-year bond yield had also reached key resistance area, which may mean lower yields moving forward and thus a reduction in the opportunity cost of holding gold over fixed income. In any case, however, with the Fed and other central banks seen cutting interest rates a few times this year, there’s no doubt in my mind about gold’s long-term bullish outlook, regardless of what it might do in the shorter-term outlook.

Dollar and yields dip as investors ponder over mixed data ahead of CPI

Gold investors will be watching the direction of the dollar and bond yields closely this week. The greenback finished the first week of 2024 higher on reduced bets over a Match Fed rate cut.  At the start of today’s session, the dollar was a touch firmer, but it has since turned lower as investors still try to make sense of Friday’s mixed US data. Bond yields also turned lower, with the US 10-year yield finding strong resistance from the key 4.05-4.10% area, which was formerly support and where the 200-day average comes into play:

If yields were to fall further from here, then this should help to underpin gold, as it will reduce the opportunity cost of holding the precious metal.

Investors were handed conflicting data from the world's largest economy on Friday, injecting some uncertainty into the markets. This was evidence in indicesive price action in several markets, all ending Friday’s session with doji or doji-like candles. Despite a weakening dollar after the NFP, the headline beat was not as robust due to downward revisions in previous months' data. The ISM survey's weaker-than-expected showing intensified the dollar selling, with the PMI’s employment component dropping below 50. Despite the initial dip, though, the dollar rebounded by the session's close, ending little-changed. It is clear that the US labour market is cooling, but not rapidly enough to prompt first-quarter rate cuts, especially with resilient wage growth and a low unemployment rate. The unclear employment picture makes the dollar sensitive to incoming data. The focus will swiftly turn to the upcoming December CPI and PPI reports later in the week.

Gold outlook: Long-term view remains bullish

As we progress through 2024, global inflationary pressures are expected to ease, prompting a cycle of interest rate cuts. The European Central Bank, Bank of England, and the Federal Reserve may initiate this process, with the latter possibly as early as the end of the first quarter. The other two may wait a little longer, considering they were relatively less dovish in their respective meetings in December.

Regarding the Fed, it has outlined plans for three rate cuts in 2024, but the market anticipates a couple more by year-end. The timing and extent of these cuts depend on incoming data. The rise in gold prices in 2023, driven partly by expectations of 2024 rate cuts, could lead to solid support for the metal once these central banks implement policy loosening and yields start to fall. Gold might even start a new bullish trend before actual rate cuts, as markets often anticipate future developments.

There's significant pent-up demand for gold due to heightened inflation in recent years and the erosion of value in fiat currencies. As a perceived store of value, XAUUSD is expected to find support in the face of any substantial short-term weakness.

Gold technical analysis

At the time of writing, gold was trying to find support from around $2030 after dipping below this short-term support level earlier in the day. In light of the metal’s inability to hold onto Friday’s small gains, short-term bullish traders will now want to see evidence and a clear bullish signal to confirm that the metal has formed a low, before looking to potentially get onboard on the long side.

Below $2030 support, the next key level to watch is around $2000, the psychologically-important support level, followed by around $1950, which roughly corresponding with the rising 200-day average and prior support. The positive slope of the 200-day MA objectively indicates that the long-term trend is indeed bullish for gold.

On the upside, the next target is around $2075, a resistance level from August 2020, which is going to remain a pivotal zone for gold. The metal has not been able to post a weekly close above this level. If and when it does, then the December 2023 high of $2146 will come into focus next.

Source for all charts used in this article: TradingView.com

-- Written by Fawad Razaqzada, Market Analyst

Follow Fawad on Twitter @Trader_F_R