Gold prices are enjoying some relief, after falling by more than 7% from the two-month high of around $1960 that it posted last week.
On a week-to-date basis, spot Gold is eking out a 0.6 percent advance at the time of writing. The slight recovery has pared Gold’s year-to-date losses to less than 2%.
From a technical perspective, Bullion’s 200-day simple moving average (SMA) has been called into action once more, playing its role as a key support level. Gold bulls can take comfort from the fact that, since the end of 2018, prices have been trading consistently above its 200-SMA, and the two dips below that line over the past 12 months have been short-lived.
“In other words, Gold’s uptrend that extends back to 2018 remains intact, with the 200-SMA having been a reliable support level.”
Also note that the pullback which began last week could be deemed a healthy move from a technical perspective, considering that Gold’s 14-day relative strength index had reached overbought status by hitting the 70 mark.
“With much of the froth now seemingly cleared, the precious metal may now make a more rational move higher.”
Still, spot prices may have to clear that November high of $1965.46 to embolden Gold bulls further.
Note that Gold has an inverse relationship with the Dollar, given that the precious metal is priced in USD. In simpler terms, when the Dollar goes down, Gold prices tend to go up, and vice versa.
Also note that Gold is a zero-yielding asset.
When the yields on US Treasuries climb, they make such investments more attractive relative to the zero-yielding Bullion. This could result in a rotation away from Gold to Treasuries, with the latter widely deemed to be a risk-free investment.
With such a context in mind, the recent pullback in Gold prices was the result of a Dollar rebound amid surging Treasury yields.
The 10-year Treasury yields strained towards the psychologically-important 1.20 percent level, after surging 30 percent between the past two Tuesdays (5 – 12 January), reaching its highest levels since March in the process. Since then, the 10-year yields have retreated by about 6.4 percent, while the Dollar index has moderated back below the 90 mark, offering some respite for Gold.
“There appears to be enough reasons to remain bullish on Gold, and they revolve around US inflation.”
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