- Gold is consolidating as easing oil prices and risk appetite offset Middle East risks.
- A short-term bullish setup is developing, but the broader trend remains uncertain.
- Gold needs to clear $4,400 to strengthen the bullish case, while $4,235 is key support.
has started the new week slightly weaker after ending a three-week losing run with a rally in the last two days of last week as the rally paused and oil prices retreated. Risk appetite has improved with major indices bouncing and extending its rally to $85K.
It looks like the market is betting that the disruption to Middle Eastern crude exports can be contained, while there is also lingering hopes of de-escalation in the US-Iran conflict. But the situation remains far from certain, and a lot can still go wrong.
Indeed, Trump has again threatened to “blow up” Iran as he left the Camp David retreat a day earlier than expected. Gold is therefore in consolidation mode, as investors weigh the relative calm and return of some risk appetite against the potential for renewed hostilities.
Will the US Dollar Find Renewed Support?
With oil prices easing around 10% from their recent highs, this has removed a major source of support for the US dollar against some of the stronger currencies like the , while the weaker currencies like and remain under pressure, owing to a hawkish Fed rate hike last week and dovish-leaning rate decisions from the BoJ and BoE.
The key question for the US dollar is where do we go from here? There is not much in the way of economic data to provide the market with new information this week to help with interest rate expectations. So much of the focus will remain on oil prices and the Middle East. If oil finds renewed support, the US dollar and Us bond yields should be able to rise more broadly and that, in tun, could keep some pressure on zero-yielding assets like gold. Else, the relative calm in the markets continue, and we see some further losses for oil and bond yields, then gold could regain further ground.
Will Gold Be Able to Resume Higher From Here?
For now, the slightly lower yields and weaker are positives. But if oil prices find renewed support, inflation concerns could return very quickly, and markets may start betting on two rate increases for the remainder of the year. That would be a much more difficult environment for gold to thrive in.
From a technical perspective, the breakout from the falling wedge pattern we saw last week looks similar to price action preceding the breakout in early August. While this looks technically bullish in the short-term, which could pave the way for some further gains in the next few days, let’s not forget the higher time frame.
Gold has been effectively in consolidation mode since peaking back in January. The series of lower highs and lower lows have not yet been violated to suggest the trend has turned bullish again. Thus, the bigger risk is if this bullish-looking price action turns out to be another false signal – similar to the price action in the first couple of days of September. IF that turns out to be the case, then we could see a much bigger long side liquidation than we so far have.
So far, though, there is no such sign and gold may be able to gain a bit more ground in early this week.
Key resistance is now seen around $4,400. As a minimum, I’d like to see gold break above that level on a closing basis before I am convinced. Further resistance is seen around $4,500 and then $4,565.
Conversely, if gold turns lower from current levels, and goes on to eventually break below support at $4235, then that could pave the way for a continuation towards $4,100 initially, ahead of $4,000 next.
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Disclaimer: This article is written for informational purposes only; it does not constitute a solicitation, offer, advice, counsel or recommendation to invest as such it is not intended to incentivize the purchase of assets in any way. I would like to remind you that any type of asset, is evaluated from multiple perspectives and is highly risky and therefore, any investment decision and the associated risk remains with the investor.
