Gold weekly outlook: Elevated yields and oil price pose risk to XAU

This weekly gold outlook was written late in the day on Friday. At the time of writing, the metal was still some 0.9% higher on the week, adding modestly to the sharp 7.4% gains from the week before. Helped by another batch of softer US economic data, the precious metal found support as the dollar weakened broadly. Looking ahead, there is not much in the way of economic data in the week ahead. A lot will now depend on the direction of global bond yields and oil prices. Bond yields pushed higher again on Friday as the consolidation near the upper end of the recent range continued, mirroring the price action of oil prices, which repeatedly found support on the dips.

 

Softer US data, but yields remain firm

 

Gold’s fundamental backdrop may have improved in recent weeks, but the metal still faces a significant obstacle from elevated bond yields.

 

Last week’s weak payrolls report was followed by broadly in-line inflation, softer retail sales and weaker consumer sentiment. Taken together, the data suggest that US economic momentum may be losing some steam, strengthening expectations that the Federal Reserve could leave rates unchanged in September.

 

The dollar has weakened, which would normally provide support for gold. Yet Treasury yields have remained stubbornly high. That is becoming an increasingly important risk, not only for gold and other low-yielding assets, but for equities as well.

 

Oil remains the key variable

 

Attention is now turning back towards the Middle East and oil prices. There there has been little meaningful progress towards reviving the previous US-Iran agreement. Uncertainty around the Strait of Hormuz remains a major risk for global energy markets. This complicates the gold story. Although recent US inflation data have been relatively benign, oil prices rose by roughly 20% in July. If energy prices remain elevated, or worse, rise further, inflation could prove stickier than expected. That would make it harder for the Fed not to tighten its policy and could push both bond yields and the dollar higher — two clear headwinds for gold outlook.

 

Golf technical analysis

 

During much of this week, gold was testing an important resistance zone around $4,365-$4,455. It was still holding below that zone at the time of writing. The zone is significant because it combines a previous swing low with an area that has changed from support into resistance.

 

 

Initial support sits around $4,300-$4,305 on XAUUSD, followed by $4,200. Below there, $4,100-$4,120 is more important, as it marks the base of the recent breakout.

 

A sustained break above $4,365-$4,455 would strengthen the case for a broader bullish trend. Failure to clear the zone, particularly if the dollar and oil prices strengthen again, would keep the consolidation or bearish argument alive.

 

In summary

 

Gold remains well placed to benefit from a more dovish Fed, and last week’s rally showed how quickly prices can respond when rate and dollar expectations move in its favour. However, more concerning is the lack of convincing follow-through this week, suggesting that momentum may be fading. Gold may need another run of softer US data — and, crucially, lower Treasury yields — before it can convincingly break above resistance and establish a more durable bullish trend.

 

-- Written by Fawad Razaqzada, Market Analyst

Follow Fawad on Twitter @Trader_F_R