Gold forecast: Will XAU/USD rise on lower yields?

Gold has started the new week on the back foot after climbing more than 1% on Friday, to post a positive close on the week which ended a three-week losing streak. Gold climbed even as the US dollar index rallied on Friday. The dollar’s strength came primarily because of a weaker euro, which tumbled to below 1.07 handle amid ongoing political turmoil in France – something which also hurt European indices and undermined other risk-sensitive currencies. Europe’s mainland indices were showing losses of 1.5 to 3.2 percent on Friday, before bouncing back on Monday. The resulting risk-off trade on Friday further boosted the appeal of the precious metal as the spread between French and German 10-year government bonds continued to widen. Meanwhile, the Bank of Japan’s vague announcement to decrease its bond purchases by an unspecified amount in the future also weighed on bond yields, which further boosted the appeal of zero- and low-yielding safe-haven assets like gold, silver and Swiss franc. But what about the gold forecast heading into the new week and deeper into 2024?

Gold forecast remains favourable despite dollar strength

In recent years and this year in particular, gold has been a preferred hedge against inflation, as fiat currencies have lost purchasing power due to several years of above-forecast inflation. Despite high interest rates from central banks and attractive nominal returns from government bonds, gold has risen and maintained its value. Although global inflation has eased, the disinflation process has been slow. The US Federal Reserve reduced its interest rate cut projections this week, which led to a slight negative reaction from gold traders who had anticipated faster policy normalization. But deteriorating data could spur new optimism for rate cuts, potentially boosting gold prices.

However, if inflation and wage data remain high, this could delay policy normalization and potentially dampening gold's appeal. Major central banks like the European Central Bank and Swiss National Bank have begun cutting rates, while others like the Bank of England and US Federal Reserve are expected to follow suit later in Q3. The extent of future rate cuts depends on incoming economic data, and more cuts than expected could lift gold prices further. Nonetheless, demand for gold is likely to remain strong due to recent high inflation and fiat currency devaluation, limiting the downside risk for gold prices in the second half of the year.

Gold forecast: Technical analysis

Source: TradingView.com

Friday’s rebound in gold is a positive signal, but the metal is currently in a consolidation phase, which needs to be respected with patience. A potential rally could be on the horizon now that the Fed meeting and CPI data are both out of the way. The bulls have pushed gold above short-term resistance at $2330, but it needs to hold there to signal turnaround. At the time of writing on Monday morning, it had drifted below this level again. But the week has just started. An ideal scenario at the start of this week would be for the bulls to push it past the short-term bearish trend line around $2360. Support at $2300 has remained strong despite several attempts to breach it. Encouragingly, there hasn't been any bearish follow-through after last Friday's sell-off triggered by a stronger-than-expected jobs report. However, the short-term XAUUSD forecast will become slightly bearish if there is another daily close below $2300 in the week ahead, which could lead to further short-term selling toward the next support level at $2222.

-- Written by Fawad Razaqzada, Market Analyst

Follow Fawad on Twitter @Trader_F_R