Gold Price Forecast: XAU/USD's recovery remains capped below $1820

Update: Gold (XAU/USD) edges higher around $1,817, up 0.26% intraday, heading into Tuesday’s European session. In doing so, the yellow metal prints the highest daily gains in a week as market pessimists pause for fresh clues. However, the firmer US dollar, backed by a pause in the US Treasury yields’ south-run near the five-month low, test the gold buyers. It’s worth mentioning that the hopes of passage of the US infrastructure spending bill, ahead of its procedural voting on Wednesday seem to consolidate the market sentiment.

However, the Delta covid variant woes and reflation fears remain on the table to challenge the gold traders moving forward. Also in the pipeline, as directives, are chatters over the Sino-American tussles and the US housing numbers.

At the time of writing, gold is a touch lower in Asia at $1,811.11 following a trip to the downside early in the US session.

There was a round turn overnight between a low of $1,795.12 and a high of $1,817.42 as gains in the USD eased. 

After all that, XAU/USD was ending flat on the day despite that risk-off tone that weighed heavily on the likes of silver prices and currencies, such as the commodity-linked AUD.

Worries about the Delta variant has been supporting the greenback and weighing on equities as well as commodities at the start of this week.

The energy complex was probably the worst off due to the concerns about a third global wave in Covid.

The August WTI contract fell by a whopping $5.32 (7.4%) while the Sep Brent contract fell by $4.89 (6.6%). Oil was a major contributor to the drop in the CRB index that ended down over 3%.

The Vix is also back above 20, soaring to a fresh daily high of 24.78 from 19.27 the low. The S&P 500 was down over 1.5%. The US 10-year was 11.5bps lower at 1.176%.

Consequently, DXY was up for the third straight day and it had traded at its highest level since April 5 near 93, not far off the March 31 and YTD high near 93.437. 

Besices the precious metals, industrials metals also crumpled with copper down 2.47% at $9,194, aluminium down 2.75% at $2,420 and nickel down 3.6% $18,380.

What lies ahead for gold?

The dollar smile theory could be significantly bearish for gold prices going forward. 

As analysts at ANZ Bank explained, ''despite the vaccine rollout, markets do not appear to be embracing the idea of learning to live with COVID-19. Sentiment appears to have shifted, at least for the moment, to persuasion that growth and earnings expectations may be overdone.''

Meanwhile, the number of new infections is rising in southeast Asia and most US states as well with the highly infectious Delta variant taking hold.

There lies within prospects for continuous risk-off for the foreseeable future.

There are significant concerns that the worst is yet to come from the delta variant, especially considering how unprepared the US potentially is. 

While weekend reports have centred around the UK's conundrum in that it had tallied 54,674 new coronavirus cases on Saturday, the biggest one-day increase since January, and 41 new deaths, just as it intends to remove lockdown restrictions, the US's problem is moving to the forefront.  

The average number of infections per day have been tripling in the past 30 days in the United States, according to an analysis of Reuters data.

Reuters wrote, ''deaths, which can lag weeks behind a rise in cases, rose 25% last week from the previous seven days with an average of 250 people dying a day.''

''COVID-19 outbreaks are occurring in parts of the country with low vaccination rates. About one in five new cases is in Florida, and the vast majority of people hospitalized for COVID are unvaccinated.''

Meanwhile, the UK's full vaccination rate for 50-65-year-olds are around 86% but they are only 66% for the US and that’s a big difference. This US could be a fertile breeding ground for the delta variant. 

At some stage, should the USD suffer a significant exodus of investment pertaining to the spike in covid, gold would be expected to benefit, especially considering the Fed would be less pressured to hike rates sooner than later. 

However, the immediate concern for markets is whether we are going to see a slowdown in the global economic recovery.

This could be the overriding force that results in strong demand for the greenback, especially as all current data points to a hawkish theme at the Fed. 

''Since the FOMC last met, the labour market, Retail Sales and inflation have all come in very strong. While the rise in COVID cases is a valid concern, there is a risk that the market is becoming too dovish on its expectations for the Fed’s communication next week,'' analysts at ANZ Bank said. 

This completes the thesis that the US dollar smile theory is real and a headwind for gold prices for the foreseeable future.

Analysts at Brown Brothers Harriman described the theory as ''strong US data are feeding into increased dollar bullishness as the Fed continues to take tentative steps towards tapering... On the other hand, growing risk-off impulses are helping the dollar recently. This supports the view that the greenback is likely to benefit in either situation. Hence, the smile as the dollar turns up at both ends of the risk spectrum.''

Gold technical analysis

Technically, gold's breakout from its recent trading range may be attracting some interest from technicians, but it has recently taken a turn for the worst, pressuring the convergence of the 10 and 20-day EMAs near 1,810:

 However, only a  break and daily close below the 1,800 thresholds would likely upset the bulls. 

Meanwhile, from a weekly perspective, the bears could be looking to engage in droves from the 38.2% Fibonacci wall of resistance:

The confluence of the 20 and 10 EMAs, a prior structure dating as far back as summer 2020 bar November's business as well as the 38.2% Fibo makes for potentially strong resistance. 

The counter-trendline support and confluence of the -61.8% Fibo for the current correction's range near 1,700 could come under pressure on a break of the current daily lows of 1,750.

Previous update

Update: Gold price is making another headway towards the 200-Daily Moving Average (DMA) at $1825, the earlier critical support now turned resistance, as the bulls look to extend Monday’s impressive rebound. Amid a rebound in the S&P 500 futures and Treasury yields, the US dollar is retreating across the board, aiding gold’s recovery so far this Tuesday’s trading. However, it remains to be seen if gold price can sustain the bullish reversal and recapture the 200-DMA ahead of the US housing data and incoming covid updates.  At the time of writing, gold price is adding 0.22% on a daily basis, trading at $1817.