Gold Pullbacks From $2,000, is The Uptrend Still Intact?
Gold is trading lower on Wednesday as investors are taking a pause from the rally performed in the last two sessions and the US Dollar is showing some resilience just ahead of the release of the FOMC minutes.
Currently, XAU/USD is trading at 1,965/oz, which is 1.81 percent down on the session. In the month, the yellow metal is trading negatively for the first time in the last five months, but since March lows at 1,451.43, the XAU/USD has jumped around 36 percent to current prices.
In the year, the metal is performing near to 30 percent positive.
What's Behind The Gold Rally?
Basically, the weakness that the dollar is experiencing in the last months due to central bank money injection, coronavirus concerns, and low US Treasury yields, is the force behind the XAU rally.
Other catalyzers for the gold rush have been the dual condition of the metal as a safe haven in times of uncertainty and a secure investment as the metal is in the crossroads of every bullish force in the market.
That being said, gold reached a long awaited milestone in August when the XAU/USD was priced at $2.000 per ounce.
It reached all-time highs at $2,075.28 on August 7, and then, it started to fall. Among the reasons, experts said profit taking after a multi-month rally, consolidation after reaching the 2,000 level, and a change in the odds against the COVID-19 pandemic due to a potential vaccine.
A Healthy Retracement
After reaching an all time of 2,075,28 on August 7, gold bounced back at August 12 lows at 1,862.89 to be traded again at 2,015.00 on August 18, where it found another strong resistance.
In any case, for most traders and analysts, a pause in the gold rally has been expected in the last weeks, and it is seen as a healthy pullback that would lead to further increases.
Yes, The Case of a More Bullish Gold, But be Aware of Pullbacks
According to George Gero, managing director at RBC Wealth Management, short term direction for gold is not clear as gold trading activity is normalizing after months of a crazy rally.
The dollar is trying to stabilize, but buyers await dips in gold as none of the usual global worries have eased.
In the same line, analysis at Credit Suisse considers that although they continue to see the core long-term trend higher, the firm expects there will be a more protracted consolidation phase to happen first. Then, Credit Suisse sees gold rallying to 2.700 in the long term.
The firm says:
At present, our bias is for a cluster of supports at $1867/37 to ideally hold further weakness, which includes the 23.6% retracement of the rally from the 2018 low, should weakness extend, we would see scope for a deeper setback to $1765, potentially $1726. Post this phase we look for an eventual move above $2075 with resistance seen next at $2175, then $2300. Whilst we would look for a fresh consolidation at this latter level, a direct break can see potential trend resistance at $2417, with scope seen for $2700/20 over the longer-term.
Daniel Ghali, a Commodity Strategist at TD Securities, agrees with Credit Suisse as he said in a recent note to clients that "it feels good to be a gold bug" as the uptrend has been proved and the risk to suffer losses has been minimal. However, he also warned about potential drawdowns and limited upside.
What is more clear, is what comes next, when momentum stops paying. As upside momentum subsides following extreme instances, forward returns tend to be skewed negatively, with sharp drawdowns and limited upside. A consolidation period could last for months, with subsequent drawdowns over 17%. Don't fight the trend, unless it shows a sign of weakness.
Keep an Eye on The US Dollar
As mentioned earlier, one of the most critical catalyzers for the gold rush has been the US dollar weakness. So, traders will keep an eye on how the Fed will act in the next months and how inflation will interact with the greenback.
Any change in the Federal Reserve's monetary policy that can affect inflation will have an impact on the US dollar.
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