Gold Price Forecast: reemerging as a safe haven asset, sustained CNY slide a net positive for gold

Currently, gold is trading at $1,226/Oz - up 0.6 percent this week, having scored gains in the previous three weeks.

More importantly, the yellow metal likely reemerging as a safe haven asset as it is about to end the week on a positive note, despite a 0.73 percent weekly gain in the dollar index (DXY),

Further, a sustained drop in the CNY could bode well for the yellow metal.

At 6.94 per USD, the Chinese yuan (CNY) is already down 6.7 percent on a year-to-date basis and has depreciated by 11 percent from March highs. Technically speaking, the CNY looks set to cross the major psychological mark of 7.00 per USD.

There is a widespread belief in the market that the People's Bank of China (PBOC) would step in to support yuan if it crosses 7.00. However, things may get ugly if the Chinese central bank refrains from doing so or fails to control the market.

The Trump administration may respond to a sustained drop in CNY by launching the fourth round of US tariffs on China. A further escalation of the trade war will likely be a risk-off event, leading to a rally in the safe haven yellow metal.

Also, heightened risk aversion may force investors to scale back the Fed tightening expectations, leading to a sell-off in the US dollar - gold's biggest nemesis.

Another possible outcome of a sustained slide in the yuan could be currency wars. President Trump, who launched a verbal assault on the Fed recently, may up the ante against the Fed's rate hike plans, in which case the greenback may take a beating. History shows gold tends to benefit the most from currency wars.

So, it seems safe to say that the odds are stacked in favor of gold bulls.

The bullish continuation pattern, as seen in the daily chart below, also favors an extension of the ongoing rally toward the 200-day EMA of $1,250. A break above that level would expose the 100-week EMA of $1,260.

The bullish view would be invalidated if prices find acceptance below the 10-week EMA, currently at $1,216. 

Daily chart