Dreaming of fresh record broken for now while Bears Pounce


  • Gold prices fail to increase recovery as bond yields rebound
  • Strong US economic data could prompt the Fed to continue raising interest rates in the second half of the year, even if policymakers hit the pause button temporarily
  • This article looks at key XAU/USDlevels to watch in the coming week

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Most read: Gold price recovery fizzles as red-hot US jobs data boosts yields

Gold prices (XAU/USD) have undergone a large downward correction from the May highs around $2,070, down nearly 6% from those highs in a short period of time. In the past week, bullion tried to recover, briefly reaching $1,983, but quickly reversed course and retreated over the weekend to settle slightly below the $1,950 threshold.

The metal’s inability to maintain bullish momentum can be attributed to US interest rate dynamics, particularly their recent rise. Although interest rates fell moderately earlier in the week, they rose sharply on Friday after remarkably strong US jobs data, resuming the broader rally that began around the second week of April.

Focusing on the macro front, the latest payrolls report showed U.S. employers added 339,000 workers in May, significantly above estimates of 190,000. Strong hiring suggests the economy is holding up well and is nowhere near a recession yet, despite the Fed’s fast and furious austerity campaign that started in 2022.

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Related: Gold prices with risk of a deeper correction on rising real interest rates, USD strength

The resilience of the economy and the labor market may slow the return of inflation to the 2.0% target. Against this backdrop, policymakers may continue to raise borrowing costs in the second half of the year, even if they temporarily hit the pause button at the June meeting to assess the delayed effects of cumulative tightening.

The possibility that the FOMC will have to take its terminal rate higher and keep it there longer to restore price stability should keep bond yields high, at least in theory, and boost the US dollar in the process. This scenario is likely to weigh on non-yielding assets, including precious metals.

For the above reasons, the outlook for gold is starting to become more bearish from a fundamental standpoint, meaning more losses could be around the corner before some sort of stabilization takes place later in 2023. This also means new record highs will have to wait and may be out of reach for bullion for the time being.

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Gold’s recent taper appears to be a corrective move within a medium-term uptrend, but the bias could turn quite negative very quickly if prices break below $1,940. This dynamic support corresponds to the lower boundary of an ascending channel that has led the market higher for almost a year.

In terms of possible scenarios, if XAU/USD breaks below the $1,940 floor, the downside pressure could add strength, encouraging the bears to launch an attack on $1,895, 38.2% Fib retracement of Sep 2022/May 2023- the rally. On further weakness, we could see a move towards $1.875.

Conversely, if gold manages to establish a base around current levels and swing higher, the first resistance to watch lies at $1,975. Clearing this ceiling could trigger follow-on buying, setting the stage for a rally towards the psychological $2,000 level.


Gold price chart prepared using TradingView

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