Gold forecast: XAU/USD caught between oil spike and haven demand

Gold came off its earlier lows as it began the week under pressure after recording its first weekly decline since late January. Attempts to recover in the latter half of last week fell short, leaving earlier losses intact. The weakness has been driven largely by the sharp rise in oil prices, which has pushed the US dollar and bond yields higher. With crude surging above $118 today, gold came under renewed selling at the start of the session. But oil prices have since fallen over $20 (~18%) from their overnight highs, lifting stock indices and gold off their lows. Expectations of coordinated release of strategic petroleum reserves has soothed concerns slightly. While this is not confirmed, the reports have done the trick for now. Still, oil prices were still higher on the day and remain significantly up since the war started. For the gold forecast, the key question is this: will haven flows into gold be enough to keep prices supported above the $5,000 level regardless of the oil volatility? Given the situation in the Middle East, I am still giving the benefit of the doubt to the bulls.

 

Oil shock has weighed on gold – for now

 

Gold’s recent weakness largely followed a sharp spike in oil prices, which pushed both the US dollar and bond yields higher. Typically, rising yields are a headwind for assets like gold and silver that don’t generate income and carry storage costs. Even so, gold had been holding up surprisingly well against elevated yields in recent weeks—until that pressure began to show last week. At the start of today’s session, gold dipped again, which was hardly surprising given the stronger dollar and higher yields. The metal did manage to bounce off its early lows as the session progressed, although it remained in negative territory at the time of writing.

 

Just how long any disruptions to the flow or production of oil in the Middle East last matters for crude oil, and by extension, the gold forecast. It’s not just about the price level of oil, but how long prices stay elevated. A couple of weeks may not be too damaging. But if we are talking about more than just a few weeks — say, months — at these higher levels, then this should hit the global economy quite badly and lead to another inflation spike. As a result, bond yields and US dollar should remain supported, keeping gold’s upside limited.

 

Gold forecast: safe-haven demand offsets yield pressure

 

What makes this a bit complicated, though, is that the Middle East conflict is also boosting haven demand for gold. This makes its downside also limited, keeping longer term investors still interested in buying the dips.

 

So, the impact of the oil price surge on gold has been somewhat mixed. On one side, higher bond yields and a firmer US dollar have weighed on prices. On the other, ongoing geopolitical tensions—particularly in the Middle East—have continued to support safe-haven demand.

 

If oil prices were to ease slightly, perhaps due to a coordinated release from strategic reserves, that could remove some of the upward pressure on yields and the dollar. In that scenario, gold could well find room to move higher again.

 

For now, though, price action remains fairly choppy. Gold appears to be in consolidation mode, which is creating opportunities on both sides of the market as volatility picks up.

 

XAU/USD technical analysis and key levels to watch

 

From a technical perspective, this remains very much a level-to-level market.

 

 

Support is currently sitting between the $5000 and $5050 zone on the XAUUSD chart. This area has been tested several times in recent sessions and, so far, buyers have stepped in to defend it. As long as gold holds above the $5000 level on a closing basis, the broader gold forecast still leans slightly to the upside.

 

That said, resistance is clearly defined as well. The key zone to watch sits between $5165 and $5200. This area has been tested multiple times since in recent days.

 

For now, the gold forecast remains balanced from a technical standpoint. A break above $5200 could open the door for renewed upside momentum, while a decisive move below $5000 would likely shift the near-term trend in favour of the bears. Until then, expect more sideways movement as the market waits for its next catalyst.

 

 

 

-- Written by Fawad Razaqzada, Market Analyst

Follow Fawad on Twitter @Trader_F_R