Gold traded with a mild negative bias through the early European session and was last seen hovering near daily lows, around the $1850 region.
The precious metal struggled to capitalize on the previous session's bounce from the $1837 region, instead witnessed some selling on the first day of a new trading week. The downtick marked the third consecutive day of a negative move and was sponsored by the underlying bullish sentiment, which tends to undermine demand for the safe-haven XAU/USD.
Despite growing market worries about the potential economic fallout from the ever-increasing COVID-19 cases, hopes for US financial aid remained supportive of the upbeat market mood. It is worth recalling that investors have been pricing in the prospects for a $1.9 trillion fiscal stimulus plan to help revive the US economy under Joe Biden's presidency.
Meanwhile, the likelihood of more aggressive fiscal spending in 2021, coupled with the risk-on flow pushed the US Treasury bond yields higher. This was seen as another factor weighing on the non-yielding yellow metal. That said, a weaker US dollar extended some support to the dollar-denominated commodity and helped limit deeper losses, at least for now.
In the absence of any major market-moving economic releases from the US, the broader market risk sentiment might continue to play a dominant role in influencing the XAU/USD. This makes it prudent to wait for some follow-through selling before confirming that the recent bounce from the vicinity of the $1800 mark might have already run out of the steam.
· Trading View | Gold’s weekly outlook: Jan 25-29
Gold again bounced back from the support and this move was broadly attributed to 2 things with the first being a continued fall in dollar and other being the uncertainty caused by the ongoing deadly pandemic. Last week’s important event of presidential transition was pretty uneventful in terms of the concerns it was roping in from days also failed to destabilize the gold as the focus shifted to an extra large stimulus on offing which in turn played the catalyst in the decline of dollar. Virus led fear might not reflect in current financial market as moreover everything is at or near to highs which can be another reason behind the lackluster movement in gold which should in actual terms fly given its safe haven nature since the situation post vaccination drive is not yet looking consoling as newer deadlier strains are raising questions regarding the effectiveness of current vaccines. And about the other geopolitical fundamentals, even they seem to never cease creating uncertainty. Things across the globe are looking equally gloomy as it was just a year back when the virus had started spreading and such similarity is due to moreorless exact copy of the spread by newer strains. In such a scenario gold remains the best investment asset class. To watch next week – Earnings , Fed meet, World Economic forum and other important economic data.
On the chart –
Gold made a dash towards the top of the flag again on lower dollar and added uncertainty but failed to break. This may look like a negative sign but again the pattern of inverse head and shoulders remains intact and in formation given the movement of the last week keeping the bullish trend alive. We have 2 scenarios –
1. Gold closed above the support, till this is held it can go to $1857. If this is crossed it can move towards $1875. And if this is taken out it can rally to $1886.
2. Bears tried hard again to push the price lower but failed suggesting the ongoing trend except scalp trades.
Bullish view – Bulls made another attempt to break out of the flag on back of a falling dollar and rise in uncertainty but failed to do so. The move should be seen as not a negative one but a positive as the ongoing pattern formation of inverse head and shoulders remains intact which in itself is a bullish conveyor other than very disturbing fundamentals/event which has been ongoing since a year. With both technical and fundamentals in favor of bulls they might not be kept inside the flag for a longer duration and once the flag breaks with a solid confirmation then it will be no looking back.
Bearishness continues to remain out of context.
On larger terms, gold continues to remain bullish and prices are expected to head higher.
Possible trades are on both sides but mainly on upside, gold can be bought above $1858 for the targets of $1875 and $1886 with a stop loss placed below $1848. Longer term target $1901.
Dips towards support (and breakout region) can be used to create longs for the above mentioned targets.
Shorts can be useful for scalp trades only.
· Biggest Influence on Gold Will be Direction of Treasury Yields
The 10-year Treasury yield dipped on Friday morning, as President Joe Biden’s proposed $1.9 trillion stimulus package faces opposition in Congress just a week after he announced the plan.
The yield on the benchmark 10-year Treasury note fell to 1.086%, while the yield on the 30-year Treasury bond dipped to 1.847%.
The drop in Treasury yields came as moderate Republican senators critiqued Biden’s plan, while another Democrat lawmaker said he would oppose another coronavirus relief check to Americans.
Here’s the tricky part that could confuse gold traders.
If Biden’s gets his $1.9 trillion stimulus package, in other words, everything he is asking for, then inflation could go up. If inflation goes up then Treasury yields will move higher, helping to support the U.S. Dollar. A stronger dollar will then drive down foreign demand for dollar-denominated gold.
If the Biden plan struggles in Congress and a smaller package is passed then stocks could pull back, which means demand for risky assets would fall. This would also send investors into the safety of the U.S. Dollar, and once again, gold prices could be capped.
Short-Term Outlook
At this time, there is no clear bullish catalyst for gold so a rally may have a hard time gaining traction. The long-term fundamentals are bullish enough to provide support, but a runaway rally like we had last year from April to August is just not in the cards right now.
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