Gold Price Analysis: XAU/USD's bounce from 4.5-month lows continues as inflation expectations rise

Gold has risen to two-week highs, extending the bounce from the Nov. 30 low of $1,764, possibly tracking the uptick in the long-term US inflation expectations. 

The 30-year breakeven inflation rate – a gauge of the financial market's expectations for long-term price pressures – rose to 2% on Monday to hit the highest level in nearly 19 months. 

The 10-year breakeven rate has increased from 1.69% to 1.89% (also a 19-month high) in the past two weeks. Rising inflation expectations are considered bullish for scarce assets such as gold. 

Also, weakness in the dollar could be powering the recovery in the yellow metal. The dollar index, which tracks the greenback's value against majors, fell to over two-year lows below 90.50 last week and was last seen at 90.87 – down 3% this quarter and nearly 6% on a year-to-date basis. 

Some observers believe the "reflation trade" has begun, and the dollar would continue to lose ground, pushing gold higher. Morgan Stanley analysts expect the greenback to weaken by 10% over the next 12 months. 

The reflation trade seems to have kicked off by hopes for additional US fiscal stimulus alongside continued monetary stimulus by the Federal Reserve and expectations for a swift global economic recovery on coronavirus vaccines. 

Technical levels