Gold Price Forecast: XAU/USD corrects from multi-month high, geopolitical risks favour bulls

Gold struggled to capitalize on its early modest gains to the highest level since early June 2021 and witnessed an intraday turnaround from the $1,914 region. The retracement slide extended through the first half of the European session and dragged spot prices below the $1,900 mark, though lacked follow-through. The sharp pullback could be attributed to some profit-taking amid a pickup in demand for the US dollar, which tends to undermine the dollar-denominated commodity.

Apart from this, a modest recovery in the equity markets exerted additional downward pressure on the safe-haven precious metal. The market's nervousness over the worsening Ukraine crisis eased after the Russian envoy to the United Nations, Vasily Nebenzya, said that they remain open to a diplomatic solution. That said, the risk of a further escalation in tensions between Russia and the West over Ukraine should act as a tailwind for gold and help limit any further losses.

Russian President Vladimir Putin upped the ante on Monday by recognizing two breakaway regions in eastern Ukraine as independent entities and ordered troops to enter the area to maintain peace. The latest development fueled fears about a full-blown East-West conflict, which would keep investors on edge. Apart from this, expectations that the United States and allies will announce new sanctions against Russia should lend support to gold prices.

A sharp decline in US Treasury bond yields might cap gains for the USD and benefit the non-yielding gold. The recent political development might force investors to scale back their speculations for a more aggressive policy response by the Fed to combat stubbornly high inflation. This, along with the global flight to safety, dragged US bond yields lower and warrant caution before placing aggressive bearish bets around gold.

Market participants now look forward to the US economic docket, highlighting the release of the flash PMI prints later during the early North American session. This, along with US bond yields, will drive demand for the greenback and provide some impetus to the metal. The key focus, however, remains on the situation in Ukraine, which will play a key role in influencing the broader market risk sentiment and infusing some volatility around gold prices.

Technical outlook

From a technical perspective, slightly overbought RSI (14) on the daily chart seems to be the key factor that has prompted traders to lighten their bullish bets. Hence, any subsequent decline might still be seen as a buying opportunity near the $1,888-$1,887 region. This should help limit the downside near the $1,880-$1,877 horizontal zone. Failure to defend the said support levels could pave the way for an extension of the corrective slide towards the $1,855-$1,853 zone. The latter marks a downward-sloping trend-line resistance breakpoint, extending from June 2021, and should act as a strong base for gold prices.

On the flip side, bulls might now wait for some follow-through buying beyond June 2021 high, around the $1,916 region before placing fresh bets. Gold could then accelerate the momentum and climb to the next relevant hurdle near the $1,930-$1.932 area.

Gold daily chart

Key levels to watch