After rallying for five straight days, the price of Gold (XAU/USD) has stalled and struggled to break through the key resistance level around $1,800. The rise was on the back of investors piling into the safe haven asset due to concerns over the delta coronavirus variant and weaker economic data out of China amid fresh lockdown measures to contain the latest Covid-19 outbreak. The data reinforced broader fears over threats to the global recovery from rising virus cases and US inflation being more than just transitory. While real treasury yields dropped increasing the appeal to move funds to gold.
This five-day rally came after a sharp drop last week in gold partly due to a strengthening dollar which saw the price of Gold fall over 6% in the space of two days from $1,800 down to $1,680; a level that has previously acted as strong support back in March this year which lead to gold rallying all the way up to $1,915 by June 2021. This level has proven to be strong support level once again as gold is now trading back at $1,800, completely eradicating the sharp sell off. The bounce from the $1,680 level was very sharp which caused investors that were short on the way down to buy back these trades which in turn lifted prices further furthering fuelling the recovery in price. However, the past week the price has stalled at this level, failing to break higher again.
So where next for Gold? Will it continue its recovery and push back towards $2,000 or will Fed tapering derail such a move?
With regards to upcoming events that could disrupt Gold’s impressive recovery there is one in particular that stands out and that is the Jackson Hole Symposium starting on the 26th of August. Investors will be listening out for any updates to the Fed’s tapering timelines or any mention of the US economy being closer to a return to full employment. An important milestone, as this has been earmarked as the point when the Fed will start to unwind their bond-buying program and look to raise interest rates at the stage of full employment. If there are indications that the Fed will start the tapering process sooner than currently expected, it could act as a headwind to XAU/USD’s resurgence. A shift in policy could cause further USD strength that would play against Gold’s progress; coupled with the fact that such a move would imply that the recovery in the U.S is stronger in the Fed’s eyes than currently that will likely led to investors to move their exposure away from gold (safe haven asset). Therefore, if the market and investors see more proof of an improving position and a stronger global recovery, we’d expect to see a balance of gold prices at lower levels, and a push below $1,680 (the strong support level) could have wider implications for the price of gold from a technical standpoint.
On that note, let’s look at these technical levels on the XAUUSD daily chart:
Chart 1 above shows the price of XAUUSD from June 2020 to August 2021. We observed a strong rally during 2020 that was initiated midway through March 2020 not long after the panic of COVID-19 hit the equity markets. This led to a 40% rally in Gold from $1,470 to the highs of $2,070 by August 2020. Since then, price has cooled off and in 2021 XAUUSD has traded in the range between $1,680 and $1,915. As previously mentioned, $1,680 has been test three times this year and each test has been followed by a significant push from that level. This most recent rejection has been impressive, however, Bulls will want to keep any pauses in this rally above $1,760, before making a move towards $1,830. Above $1,830 and we expect to see a push towards $1,915. A break below $1,680 could lead to a significant downward move back towards $1,600 and possibly down to the 2020 lows of $1,470-$1,500.
We recently spoke to FXChoice to get their viewpoint on XAU/USD and they had the following to say: Gold support is strong and important at $1,680. This level must hold to avoid a slide. It must be noted Gold is performing poorly when confronted with news which historically would thrust it higher – Afghanistan, the Middle East generally, inflation, low interest rates. But the support is solid, and a change of mood can quickly develop. We see declining highs in the chart, the last at $1,830 (two tops) in July. The next level to clear is the $1,915 high from May and the series of highs at $1,960 in August, November, and December last year. Gold will have a clear shot at $2,000 and the July ’20 high above it.
Gold has strong horizontal support at $1,680 and layers of resistance above. Currently, it is challenging the first of the resistance levels. We have highlighted these key resistance levels on Chart 2. These include $1,790-$1,800, $1,830, $1,865 and $1,915.
We therefore believe Gold is at a crossroads and the next few weeks are pivotal to setting the tone for the next move in Gold over the remaining of the year. A move which we believe will ultimately be driven by dollar strength or weakness depending on the Fed’s tapering outlook. On the one hand, if the Fed continues to communicate that the economy needs significant time to recover and the global economy is under serious threat from the Delta (or other similar) COVID variants then we’d expect this to continue to fuel Gold’s push back to $2,000. On the other hand, if the Fed change their stance sooner than the market expects by signalling their intention to begin the tapering process sooner than currently expected this could lead to a drop below the key $1,680 level and a wider sell off in Gold. However, our long-term outlook on Gold will remain bullish and dips below $1,680 into $1,500 or $1,600 will be viewed as strong buying opportunities over the longer term.