Gold forecast: XAU/USD cannot ignore rising yields for too long

Until today, gold has been quite resilient in the face of rising bond yields and a strong US dollar so far. But with equity markets also struggling in the last few weeks (gold and S&P have had a positive relationship in recent years), it remains to be seen whether haven demand will be enough to keep the precious metal supported. While I am bullish on gold in the long-term, I think it is due for a potential correction in the near-term outlook, as rising yields continue to increase the opportunity cost of holding the metal over the “risk free” government debt. So, my near-term gold forecast is leaning more bearish.

Gold ignores yield and US dollar strength – but for how long?

Gold ended +1.9% higher last week, marking the second weekly gain. This comes after the precious metal ended lower in December, falling for a second consecutive month after hitting repeated record highs in 2024. Remarkably, the two-week rally has coincided with the dollar and bond yields sharply extending their recent gains.

Thanks to rising bond yields amid falling expectations over further interest rate cuts in the US, the Dollar Index ended higher for the 7^th consecutive week. It is on track to rise for the fourth consecutive month, testing the key 110.00 handle.

Friday saw the US 30 bond yields hit 5%, now not far off from October’s peak of 5.178%. Meanwhile, the 10 yields are also nearing the 5% level at almost 4.80% currently.

It is not the US where yields are rising. They continued to rise on Monday in Europe with the German, French, Spanish and Italian yields all extending their recent gains. Meanwhile, the UK 10 year is nearly at 5%, breaking last year’s high of 4.755% to test its highest levels since the 2008 financial crisis. What’s more, even Japan’s 10 year yields are now at their highest since May 2011, albeit at a still relatively low 1.20%.

So, you get the picture. Bond yields have been on the ascendency amid collapsing interest rate cut expectations, thanks to resilience in data (mainly in the US) and sticky inflation (globally, outside of China). As yields continue to rise or remain around current levels, investors may think twice about buying gold at these levels as they can get decent interest payments by buying government debt instead. Gold doesn’t pay interest and costs money to store.

So why has gold been rising?

I think it is to do with inflation concerns, more than anything. Rising yields and strong dollar should normally be bearish factors for gold but that didn’t prove to be the case last week. So, it looks like investors have been buying gold to hedge against inflation risks more than anything else. But this alone may not be enough to lift prices to new records.

Gold forecast: What will investors be watching this week?

I don’t think you can ignore the bond market developments, nor the rising US dollar. The greenback has been supported by investors repricing US interest rates higher due, first and foremost, to expectations of inflationary policies under Donald Trump, when he takes office later this month. At the same time, we have seen surprising strength in US data. This was again highlighted by the non-farm payrolls report on Friday, pointing to a labour market that appears to be gaining momentum again. Consequently, traders have now shifted the full pricing of the next Fed rate cut all the way to the start of Q4.

Following the solid jobs report, attention turns to US CPI in mid-week and Chinese growth data later in the week. Should CPI inflation data on Wednesday show signs of persisting, any calls for a rate cut in the first half of the year will be firmly dismissed again. In any case, the upside potential for gold is likely to be limited until something changes fundamentally. Against this backdrop, my near-term gold forecast is not bullish.

Technical gold forecast: Key levels to watch on XAU/USD

Source: TradingView.com

The XAUUSD chart is looking interesting. The precious metal is now testing a bearish trend line derived from connecting the prior two highs, around 2680 to 2695 area. This trend line happens to cut through a key resistance zone around the 2690 area, which was the base of the breakdown in December. What's more, the 61.8% Fibonacci retracement level against the October high comes in around this area, at $2693 (not drawn on the chart). All this makes it an ideal area for the sellers to potentially step in. Can we see a potential drop here? Or will the bulls prevail despite all these technical hurdles?

If the selling resumes, the first line of defence for the bulls is at $2650 or slightly lower, marking the support trend line that has been in place since the middle of last year. But if that trend line breaks decisively, then we could see the onset of a larger correction, with support levels at $2600, $2530 and $2500 likely to then become in focus.

Meanwhile, the next area of resistance to watch is between $2710 to $2725. In the event gold manages to break through this area despite all the macro factors mentioned, then this would be a strong technical signal that could in most likelihood pave the way for a new record above last year’s peak of $2790.

-- Written by Fawad Razaqzada, Market Analyst

Follow Fawad on Twitter @Trader_F_R