Gold Price Forecast: XAU/USD eyes yields to defend $1,800

Update: Gold (XAU/USD) snapped a two-day pullback with mild gains around $1,819 to end Monday’s trading, sidelined near $1,818 during the early hours of Tuesday.

An absence of the US traders due to Martin Luther King’s Birthday allowed gold traders to consolidate the recent losses. Also favoring the gold buyers is the cautious optimism due to receding covid cases in the key economies, like the UK, Australia, the US and some parts of Europe.

Furthermore, Friday’s softer US Retail Sales and Michigan Consumer Sentiment data for December and January allowed traders to rethink the Fed’s faster rate-hike plans during the blackout period before the next week’s Fed meeting.

It’s worth noting, however, that’s the yields rallied on Friday and the week’s start will be interesting to observe as the last Fedspeak has been hawkish. The same keeps gold buyers on their toes after being rejected by 23.6% Fibonacci retracement (Fibo.) of August-December 2021 upside.

End of update.

As per the start of the week's analysis, Gold, Chart of the Week: Bearish confluences below $1,830, the yellow metal, XAU/USD, is on the backfoot still and pressured by a more robust US dollar. At $1,818, gold is trading around flat on the day after travelling in a tight range of between $1,813.20 and $1,823.21. 

With Wall Street closed on Monday, it's a quiet start to the week in markets with a light economic calendar and the Federal Reserve blackout period before the next interest rate decision later in the month, 26 January. With the coronavirus risk and negative sentiment there abating, there is little out there driving prices. Instead, a phase of consolidation has left the priors metal bounded to familiar territory with the price leaning against a key daily support structure. 

In Asia, there was at least key data from China's economy that showed it had rebounded in 2021 from its pandemic-induced slump. However, the pace slowed further in the fourth quarter off the back of weak consumption and a property downturn. This has fallen into the hands of the US dollar bulls that had taken the reigns on Friday in a risk-off market environment. 

Additionally, the PBoC was surprised by cutting the 7-day reverse repo rate in addition to cutting the 1-year MLF rate in a shift in policy that reflects the desire from policy makers to quickly stabilise economic growth.

''The PBoC has a limited window for further monetary easing, as it factors in global considerations. In particular, with the Fed looking ready to embark on rate hikes soon, the PBoC will likely intensify its focus on financial stability later this year,'' analysts at ANZ Bank explained. ''The stock market wobbles and capital outflows associated with the last Fed tightening cycle haven’t been forgotten.''

The US dollar index, DXY, which declined sharply last week until Friday's leap, rose 0.1% to 95.346 despite the cash Treasury market being closed as well for a holiday. 

We now are seeing 3.7 Fed rate hikes priced in for 2022 and 2.3 for 2023. Goldman Sachs told clients that ''market participants seem to be inferring that the risks to policy pricing are now more balanced,"

Meanwhile, China's appetite for precious metals is growing, analysts at TD Securities explained. ''Tracking positions held by the top participants in Shanghai, we find that Chinese traders have finally increased their appetite for gold and silver amid weakening growth and as domestic infections spread. Alongside an increase in CTA trend follower positioning, this flow has been sufficiently strong to lift gold prices against the prevailing narrative of a hawkish Fed.''

However, the analysts also explained that ''as global markets remain intensely focused on pricing the Fed's exit, we expect fewer sources of upside flow in the coming weeks to leave gold prices vulnerable to a consolidation.''

As for the greenback, bets that the dollar will rise have edged lower in the week's positioning data to Jan. 11. However, they remained close to recent highs, suggesting investors are keen to hold the greenback amid "hawkish rhetoric from the Fed in recent months", Rabobank wrote in a note this week. "However, the sell-off in USDs in the spot market last week suggests that long positions had become crowded," Rabobank analysts added.

All in all, this does leave the outlook consolidative for both the yellow metal and the greenback and the following technical analysis rhymes with such sentiment:

Gold 4-hour chart

At the start of the week, it was indicated that there would be an upside correction before a move lower to test support as per the chart above.

This has played out as follows, so far:

Meanwhile, the outlook is bearish and there are prospects of a move into the depths of the $1,800s to meet the $1,801 prior low. However, a break above $1,829 and a close in the $1,830's would negate the bearish outlook.