Gold Forecast: A Breakout Deterred or Merely Deferred for XAU/USD?

Gold Key Points

• Friday’s worse-than-expected US NFP report set off a spasm of fear that metastasized into panic and blind selling of every market by the US open today.
• The risk of a global recession – if it ultimately emerges – could hit demand for gold jewelry, but benefit the monetary component of gold’s value as central banks cut rates.
• Gold has yet to set a “lower low” since early June, keeping the near-term bullish momentum intact for now.

“What happens to a dream deferred?

      Does it dry up

      like a raisin in the sun?

      Or fester like a sore—

      And then run?

      Does it stink like rotten meat?

      Or crust and sugar over—

      like a syrupy sweet?

      Maybe it just sags

      like a heavy load.

      Or does it explode?”

- Langston Hughes

This is not the place for deep poetry analysis, nor am I the appropriate critic to break down one of the most influential poems of the past century, but we can draw an analogy to the frustration and speculation that many gold bulls are going through in the current environment.

After edging up to test record highs near $2480 on Friday, gold bulls were confident that the yellow metal was at long last on the verge of a breakout to $2500+. Instead, the worse-than-expected US jobs report set off a spasm of fear that metastasized into panic and blind selling of every market by the US open today. Now as we roll toward the US close though, markets seem to have stabilized again, and gold is trading $35 off its intraday low.

Taking a step back, the risk of a global recession – if it ultimately emerges – could hit demand for gold jewelry, but the monetary component of gold’s value should benefit from the attendant cuts to global central bank interest rates, making the yellow metal relatively more attractive. Ultimately, there are more crosswinds now for gold than there were a week ago, but the fundamental bullish thesis remains intact for now.

According to Rhona O’Connell, Head of Market Analysis for EMEA and Asia at StoneX, “[Gold’s selloff today] is not unusual; more often than not when equity markets turn down sharply gold is sold as a hedge against risk, in order to raise liquidity against potential margin calls.  Those sellers almost invariably then re-establish their positions when the dust settles.  A good case in point is gold’s performance in the meltdown at the onset of COVID; gold fell along with everything else, but unwound its losses in four weeks, while it took the S&P six months to claw its way back. Gold may still stay under some pressure in the near term, but the external forces at work favor higher prices.”

Gold Technical Analysis – XAU/USD Daily Chart

Source: TradingView, StoneX

As the chart above shows, Gold has rallied back sharply after testing its 50-day EMA near $2375 earlier today. The precious metal has yet to set a “lower low” since early June, keeping the near-term bullish momentum intact for now. For this week, traders will be looking to see if XAU/USD can recover back to the $2450 level and ultimately break above the record high at $2485 to clear the way for a continuation toward $2600+ in time. On the other hand, a close below today’s low and the 50-day EMA would erase the near-term bullish bias and shift the outlook to neutral for more consolidation between $2300 and $2400.

-- Written by Matt Weller, Global Head of Research

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