Gold Price Analysis: XAU/USD eyes test of 21DMA in $1840s

Spot gold prices (XAU/USD) have thus far failed to push convincingly back into the $1840s on Monday, though in fairness the metal is sharply up from Asia Pacific session lows just above $1800; shortly after the reopening of Monday trade in Asia, a mini-flash crash appears to have taken place, offering gold bulls a great opportunity to get long the precious metal as low as $1803. At present, the precious metal trades just below the $1840 mark, up roughly 0.7% or just over $12 on the day, as trade volumes drop off as European traders head for the exit and no US participants on account of US markets being closed for Martin Luthar King Junior Day.

Bulls now eye a move towards the 21-day moving average which currently resides at $1842 and then potentially back towards last week's highs around the $1860 mark. Further upside to these levels might be a struggle is USD continues to climb higher, however.

Driving the week

Precious metals traders ought to be keeping an eye, then, on how key US dollar drivers this week go, including incoming US Treasury Secretary Janet Yellen’s testimony to Congress goes on Tuesday and on how incoming US President Joe Biden’s inauguration on Thursday goes. The outlook for US fiscal will be the most important topic now that the Fed is in blackout ahead of the month-end policy meeting, as will the state of the global pandemic (do Covid-19 cases continue to rise in China? How do vaccinations go?).

Eyes should also remain firmly on what happens with US real yields and inflation expectations (derived from the difference between real and nominal yields); US bond markets are closed this Monday, but will reopen as usual tomorrow, providing further impetus for precious metals traders.

Yellen’s testimony

US Treasury Secretary Janet Yellen will give testimony at Capitol Hill on Tuesday; the former Chairman of the US Federal Reserve is expected to make it clear that the USA will not seek to purposely weaken the US dollar. According to the Wall Street Journal, Yellen will say that “the value of the U.S. dollar and other currencies should be determined by markets. Markets adjust to reflect variations in economic performance and generally facilitate adjustments in the global economy” if asked about the incoming administration's dollar policy.

Any departure from such a policy could trigger some volatility in USD and in precious metals markets. However, calls for a weaker USD does not mean getting a weaker USD; outgoing US President Donald Trump spent much of the last four years calling for a weak USD to help US exporters but failed to get until right at the end of his term, and that was only to do with the Fed’s actions to combat the pandemic. His protectionist trade policies and fondness of fiscal stimulus were seen as a USD positive combination at the time.

Bank of Singapore analyst Moh Siong Sim notes that Yellen “is kind of signaling a hands-off approach, which is reverting to what had traditionally been the case before Trump… I think the dollar and financial markets will be less of a focus, in terms of verbal rhetoric, for the Treasury secretary and the key focus will be getting policy implemented in terms of fiscal relief”.

Spot gold key levels