Gold Price Prediction: XAU/USD faces resistance at $2,000 amid mixed signals
Gold price (XAU/USD) has been trading in a narrow range between $1,910 and $1,950 for the past week, as investors weigh the prospects of global economic recovery, inflation pressures and monetary policy changes. The yellow metal has failed to break above the psychological level of $2,050ish, which has acted as a strong resistance since September 2020. On the downside, the support at $1,910 has held firm, despite the strength of the US dollar and the rise in Treasury yields.
What are the factors driving gold prices?
Gold price prediction depends on both scientific and subjective factors, such as supply and demand, market trends, and sentiment. Different sources may have different forecasts based on their methods and perspectives. For example, one source predicts that gold will reach $2,000 by the end of 2024 and $3,500 by 20321, while another source forecasts that gold will peak at $2,100 in 2023 and then decline to $2,000 by 20252.
Some of the key factors that influence gold price are:
- US dollar: Gold and the US dollar have an inverse relationship, meaning that when the dollar strengthens, gold tends to weaken and vice versa. The US dollar index (DXY) measures the value of the dollar against a basket of major currencies. The DXY has been rising since May 2020, reaching a high of 102.70 on June 263, as the market expects the Federal Reserve (Fed) to tighten its monetary policy sooner than expected amid rising inflation and economic growth.
- Inflation: Gold is often seen as a hedge against inflation, meaning that it preserves its purchasing power when the general level of prices rises. Inflation erodes the value of fiat currencies and reduces the real returns of bonds and other fixed-income assets. The US consumer price index (CPI) rose 5% year-on-year in May 2020, the highest since August 20084, driven by higher energy and food prices. The Fed has maintained that inflation is transitory and will ease as supply bottlenecks are resolved and base effects fade.
- Interest rates: Gold is a non-yielding asset, meaning that it does not pay any interest or dividends to its holders. Therefore, gold becomes less attractive when interest rates rise, as investors can earn higher returns from other assets. Interest rates are determined by the monetary policy of central banks, which set the target for the short-term policy rate. The Fed has kept its policy rate near zero since March 2020 and has been buying $120 billion worth of bonds per month to support the economy. However, the Fed signaled in its June meeting that it may start tapering its bond purchases later this year and raise its policy rate twice by the end of 20235, sooner than previously anticipated.
- Risk sentiment: Gold is also considered a safe-haven asset, meaning that it tends to perform well when there is uncertainty or volatility in the financial markets. Gold can benefit from geopolitical tensions, trade wars, pandemics, recessions or other events that pose a threat to global stability and growth. Conversely, gold can lose its appeal when there is optimism or confidence in the markets. Risk sentiment is often measured by indicators such as stock market indices, volatility indices or credit spreads.
What are the technical levels to watch for gold price?
Gold price has demonstrated a sheer fall after a breakdown of the Descending Triangle pattern on a four-hour chart. A breakdown of this chart pattern is followed by wider ticks and heavy volume. The precious metal is trading below the 200-period Exponential Moving Average (EMA) at $1,960, which indicates that the long-term trend is bearish.
The Relative Strength Index (RSI) (14) is oscillating in the bearish range of 20-40, which indicates that the downside momentum has been triggered.
The first support level is at $1,910, which coincides with the low of June 16 and June 23. A break below this level could open the door for further losses towards the next support at $1,886, which is the 61.8% Fibonacci retracement of the rally from $1,677 to $2,089. The final support is at $1,850, which is the low of December 14, 2020.
The first resistance level is at $1,950, which aligns with the 50% Fibonacci retracement and the upper boundary of the Descending Triangle. A break above this level could trigger a short-covering rally towards the next resistance at $2,000, which is a psychological barrier and the high of September 1, 2020. The final resistance is at $2,050, which is the high of August 18, 2020 and the 23.6% Fibonacci retracement.
What are the expectations for gold price in the short and medium term?
In the short term (next 6 weeks), gold price is expected to remain under pressure as the US dollar remains strong and the Fed signals a hawkish stance. However, gold may find some support from inflation fears and geopolitical risks. The key level to watch is $1,910, as a break below this level could trigger a sharp sell-off towards $1,850 or lower. On the upside, gold needs to clear $1,950 and then $2,000 to regain its bullish momentum.
In the medium term (next 12 months), gold price is expected to resume its uptrend as the US dollar weakens and inflation persists. The Fed may be forced to delay its tapering and rate hikes as the economic recovery faces headwinds from new variants of Covid-19, supply chain disruptions and labor shortages. Gold may also benefit from increased demand from central banks and investors seeking a hedge against currency debasement and negative real interest rates. The key level to watch is $2,100, as a break above this level could trigger a new bull run towards $3,000 or higher.
Disclaimer
This post is for informational purposes only and should not be construed as investment advice or recommendation. Past performance is not indicative of future results. Trading involves risk and may result in substantial losses.
