Gold outlook: Could XAU/USD be heading sub-$4000?

 

Gold prices have come under pressure once again this morning. The precious metal is now down for the third consecutive week and the fourth consecutive month at the time of writing. Unwinding of both defensive positions and short dollar bets have weighed on the near-term outlook on gold. The key question is whether gold will be able to hold above $4,000 in this not-so-strong macro environment for precious metals.

 

 

US-Iran deal triggers unwinding of defensive positions

 

The U.S.-Iran deal has significantly reduced the Middle East risk premium. The Strait of Hormuz has reopened, allowing the free flow of shipping. This should help alleviate concerns about crude oil shortages in the coming months, barring any major re-escalation of the conflict or a renewed closure of the strait. With oil prices falling, pressure on certain assets has eased, reducing the appeal of safe-haven assets like gold.

 

Hawkish Fed weighs on gold outlook

 

On top of reduced haven demand, the Federal Reserve struck a relatively hawkish tone on Wednesday when it decided to leave interest rates unchanged but signalled the possibility of a rate hike later this year. This caused the US dollar to strengthen significantly this week, putting additional pressure on gold prices. Rising or elevated interest rates also reduce the appeal of zero-yielding assets like gold and silver.

 

So, we have a combination of a stronger US dollar and reduced safe-haven flows, causing defensive assets such as gold and the Swiss franc to lose some of their appeal in this overall risk-on, dollar-positive environment.

 

Technical gold outlook: key levels to watch

 

Currently, momentum remains bearish for gold. I would not be surprised to see the precious metal come under further pressure in the days and weeks ahead.

 

 

Key support comes in around $4,100 on XAUUSD, a level that was tested back in March and again earlier this month before gold rebounded. We are now approaching that level once more. Should gold break below $4,100, sellers are likely to target this month’s low at $4,023. Below that, the psychologically important $4,000 level comes into focus.

 

If the $4,000 level gives way, the technical gold outlook could become considerably more bearish. At that point, it is difficult to estimate how far the metal could fall, although $3,500 may emerge as the next major downside target.

 

On the upside, short-term resistance is now seen around $4,170, and intraday support and resistance level. Above that, $4,200, which marks the prior session’s low, comes into focus, followed by $4,300, which is an important area where a bearish trend line comes into play. If gold manages to break above that trend line, then the previous resistance zone between $4,366 and approximately $4,425 would become the next upside target.

 

In summary

 

Overall, the near-term gold outlook remains bearish due to the strength of the US dollar, the unwinding of previously defensive positions in assets such as gold and the Swiss franc, and reduced safe-haven demand following the U.S.-Iran deal, which has contributed to a sharp decline in oil prices.

 

 

 

-- Written by Fawad Razaqzada, Market Analyst

Follow Fawad on Twitter @Trader_F_R