Gold has continued to push higher today, taking advantage of the recent weakness for bond yields and the dollar, after the FOMC minutes last night suggested there are no imminent changes to be expected in US monetary policy. But what about the outlook for gold? Is the metal going to rise further or resume lower as yields and dollar potentially rebound?
The Fed suggest that it will likely be "some time" until substantial further progress is made towards the maximum-employment and price-stability goals. This means that for now, the stimulus programme of buying assets worth $120 billion per month will continue.
However, as I mentioned earlier in
THIS report, the Fed may be forced to tighten its belt faster than it wants to given the potential for inflation to overshoot. The faster pace of vaccinations in the US combined with fiscal and monetary support means the Fed may want to ease off the gas sooner than expected as the economy potentially heats up faster. They wouldn’t want to overcook inflation and then apply the brakes harshly.
Against this backdrop, bond yields will likely remain supported, putting a floor under the dollar and a ceiling over yields. This should limit investment demand for gold as rising yields increases the opportunity cost of holding the non-interest-bearing precious metal.
However, with a recovering world economy, jewellery demand should rise as too should demand for gold as a form of inflation hedge.
So, the loner-term outlook remains mixed for gold, which means we could see the metal trade inside large ranges than trend in a particular direction.
With gold unable to hold any of its recent recovery attempts and given the uptrend for yields, I am not too bullish on gold in the short-term outlook. Indeed, if the 10-year US bond yields rebound from THIS key support area, then the dollar could resume higher and gold lower:
Source: ThinkMarkets and TradingView.com
At the time of writing, gold was up more than 1% and rising towards key resistance in the $1760-65 range. This area was previously support and could now turn into resistance.
Source: ThinkMarkets and TradingView.com
Support is seen at $1745, the base of today’s breakout above recent resistance range. If this level fails to hold on re-test in the coming days, then gold could resume lower and head below the double bottom low of $1676/77 it has recently formed.