Gold rallied sharply in the last two days, triggering speculation that the yellow metal is re-emerging as a safe haven asset, however, the gains were likely fueled by the losses in the greenback.
At press time, the yellow metal is trading at $1,218/Oz - up 1.3 percent from the last week's close of $1,203.
The week began on a negative note with gold falling sharply to $1,183 on Monday, having repeatedly failed to beat the resistance at $1,208 (23.6% Fib R of Apr/Aug sell-off) in the past few weeks. Notably, the prospects of a deeper drop toward $1,160 had gone up following Monday's sell-off.
But things changed for good in the second half of the week. Prices crossed the key Fibonacci hurdle as well as the trendline falling from April highs and rose to a ten-week high of $1,226 on Thursday, confirming a bearish-to-bullish trend change.
Interestingly, the big spike happened on the day when the Dow Jones Industrial Average (DJIA) suffered an 830 point drop. That triggered a speculation that the oversold yellow metal is making a comeback as a safe haven asset.
While the metal may have found safe haven bids, the major part of the rally was likely a result of broad-based USD weakness.
Throughout this year, the yellow metal has closely followed the action in the greenback. The equation has been very simple - gold cheers risk aversion only if it results in USD weakness.
Essentially, the greenback has been a guiding force and could continue to play a big role in determining gold's value for the rest of the year, as the Fed is expected to hike rates by 100 basis points by the end of the next years.
Focus on dollar's response to risk aversion
The US equity markets are already showing signs of stability. For instance, the DJIA is up 223 points at press time. If the recovery rally continues next week, then the greenback could regain poise, pushing gold lower.
On the other hand, if today's rally in the US equities ends up being a dead cat bounce, then the greenback may take a beating, pushing the yellow metal above the 100-day exponential moving average (EMA) hurdle of $1,226.
It may happen that issues in Europe or emerging markets trigger risk aversion in equities, in which case, the USD will likely rise.
In any case, if the US dollar shows resilience in the face of risk aversion, then gold would have little chance to post gains.
The immediate outlook is neutral, despite a convincing break above the falling trendline and 23.6% Fib hurdle, as the 100-day EMA is proving a tough nut to crack and more importantly, the US stocks are flashing green.
A break above 100-day EMA of $1,226.72 would signal a revival of the rally from Thursday's low of $1,191 and would open the doors to $1,238 (38.2% Fib R) and possibly to the 200-day EMA of $1,251.
The prospects of a bull break above the 100-day EMA would drop sharply if the metal finds acceptance below the former resistance-turned-support of $1,208.
Information on these pages contains forward-looking statements that involve risks and uncertainties. Markets and instruments profiled on this page are for informational purposes only and should not in any way come across as a recommendation to buy or sell in these securities. You should do your own thorough research before making any investment decisions. FXStreet does not in any way guarantee that this information is free from mistakes, errors, or material misstatements. It also does not guarantee that this information is of a timely nature. Investing in Forex involves a great deal of risk, including the loss of all or a portion of your investment, as well as emotional distress. All risks, losses and costs associated with investing, including total loss of principal, are your responsibility.