Gold Price Analysis: XAU/USD remains sidelined around key hurdle to north

Update: Gold (XAU/USD) prints a five-day uptrend of around $1,795 crucial resistance during early Monday. The yellow metal cheered the broad US dollar weakness the previous day to refresh the multi-day top but failed to provide a daily closing past 200-DMA and a descending trend line from June.

Fed Chair Jerome Powell’s support to tapering and absence of comments suggesting ‘transitory’ inflation pressure, probed the gold buyers on Friday. However, the recent optimism concerning China’s struggling real-estate player Evergrande and US stimulus package joins downbeat Treasury yields to keep the bulls positive.

Even so, fresh covid fears from Beijing and chatters over another real estate firm from China, namely Modern Land, struggling to pay $250 million 12.85% senior notes due October 25 challenge the market sentiment and gold prices.

Above all, a light calendar and wait for the preliminary US GDP for Q3 2021 question the momentum traders.

Read: S&P 500 Futures, US Treasury yields wobble amid quiet markets

End of update.

The price of gold ended the week back below $1,800 after spiking to fresh highs for October near $1,813. At the time of writing, XAU/USD is trading flat at $1,793 following the US dollar paring losses made on Friday after Federal Reserve Chairman Jerome Powell said the Fed should begin reducing its asset purchases soon, but should not yet raise interest rates.

Powell also said employment is still too low and high inflation will likely abate next year as pressures from the COVID-19 pandemic fade. DXY touched a one-year high last week as investors presumed that inflation will remain stubbornly high for longer. 

US dollar slides vs G10

In the month to date, all other G10 currencies with the exception of the JPY have out-performed the USD.  The ‘catch-up’ move in money market rates for other currencies has been a contributing factor as investors unwind very long positions in the greenback.

Ten-year breakeven yields are firming at their highest levels since 2012, highlighting that inflation is top of mind for global investors. Looking to the positioning data, speculators have only marginally added to their length and despite higher inflation expectations, with modest short-covering as prices edge higher. 

The dollar rally has also faded as investors build in expectations for sooner rate increases in other currencies. Meanwhile, data on Friday showed that US business activity rising solidly in October, suggesting economic growth picked up at the start of the fourth quarter as COVID-19 infections subsided.

''While gold prices have historically outperformed most major asset classes in periods of high inflation, investors are cautious about the yellow metal as they remain intensely focused on pricing the Fed's exit,'' analysts at TD Securities explained. ''Yet, we argue that market pricing for Fed hikes remains far too hawkish, as it fails to consider that a rise in inflation tied to a potential energy shock and lingering supply chain shortages would be unlikely to elicit a Fed response.''

Additionally, the analysts argued that the market is increasingly pricing in a policy mistake that is unlikely to take place, considering that central banks are likely to look past these disruptions as their reaction functions have been historically more correlated to growth than inflation.

''Reasons to own the yellow metal are growing more compelling as Fed pricing is likely to unwind. In this context, gold prices are tremendously underperforming against historical analogs, but a breakout in the yellow metal from its multi-month downtrend could signal that inflation-hedging flows are finally trumping the speculative exodus tied to Fed pricing.''

A US fiscal drag and the end of extraordinary unemployment benefits should slow the pace of economic gains, which should ultimately see Fed pricing reverse in support of gold prices.

Gold technical analysis

From a daily perspective, gold has been attempting the upside Friday's price action shows, below. Friday's wick high of the candle is a probable target for the sessions ahead. $1,835 guards territory to $1,880 as follows: