Gold outlook bullish despite short term struggles

After failing, earlier this month, to hold the breakout to a new all-time high above the August 2020 peak of $2075, gold has drifted lower and has given back around $100 of its nominal gains or just under 5%. This pullback can be attributed to, first and foremost, profit-taking. In addition, a recovery in US dollar and bond yields have also weighed on the metal. However, all these factors are likely to be a temporary obstacle, meaning our long-term gold outlook continues to remain bullish.

Why gold is likely to remain elevated

As mentioned, the longer-term gold outlook remains positive. Global interest rates are already at, or about to, peak. Meanwhile, inflation is on a downward trajectory across some economies, including the US, though admittedly, it has remained quite high and sticky in most regions. This in itself is actually one major reason why gold recently broke to a new all time high. Clearly, many people still regard gold as the ultimate hedge against rising prices and economic turmoil. A strong, stable currency, if you like. Given fresh concerns over China’s economy and elevated inflation across Europe and other major economic regions, gold’s appeal is likely to remain as strong as ever. That’s not to say gold is not going to fall further from here, as clearly gold miners will be happy to offload as much of the shiny stuff at these elevated prices as possible. But strong demand and limited supply growth should keep a floor under prices in the long-term.

China concerns holding back commodities

Global demand concerns have dragged on sentiment towards commodities in recent weeks, hurting the industrial demand element of precious metals. Hence, silver and copper have underperformed. A number of disappointing data releases from China in April, including most recently retail sales and industrial production, have held back the yuan, copper and crude oil. We also saw a big drop in imports while house prices fell again, extending the decline to 11 consecutive months. China’s property sector is key for the economic growth outlook as it accounts for around 20% of the country’s GDP.  

Gold outlook: Technical analysis

While the reaction of price breaking momentarily to a new all-time high has not been great, we have not seen a clear sign of a reversal yet. Gold’s pullback and consolidation near these highs can actually be a healthy technical development, as it allows ‘overbought’ conditions to be worked off through time. A bit of removal of the froth is never a bad thing. But momentum is lost, and gold bulls will now want to see a bullish signal to suggest the selling pressure is over and to boost the gold outlook from a technical front, in the immediate term. If no such signal is formed around current levels between $1980ish to $2000, then there are not many other obvious levels to look for a bounce, until the long-term bullish trend line shown on the chart.

Source: TradingView.com

-- Written by Fawad Razaqzada, Market Analyst

Follow Fawad on Twitter @Trader_F_R