Gold failed to build on Monday’s sharp gains and drifted lower over the course of the past couple of days. However, while it is down, it certainly is not out yet.
In fact, I still remain bullish on gold despite all the bearish commentary around it.
Yes, yields have risen along with the dollar, which is not great news for the buck-denominated metal. But I expect both to drop back.
Thursday’s disappointing US jobless claims report and last Friday’s subdued payroll growth both point to weak conditions at the world’s largest economy, even if the future looks bright with the ongoing Covid vaccine rollouts.
What’s more, Jerome Powell reminded us earlier this week that the Fed won’t be slowing its bond purchases until inflation hits 2% – and suppresses this target.
Therefore, I think bond yields will likely struggle to rise further than they already have, and the US dollar could remain under pressure. As a result, buck-denominated gold could be about to pop back higher.
Technically, gold is painting a bearish picture in that it has broken the 200-day average and bullish trend line. But is this going to be a bear trap, or is it a genuine breakdown? I think the former.
If gold now manages to reclaim the broken trend line and the 200-day average, then that could lead to a sharp squeeze higher as it would indicate the latest breakdown attempt by the sellers have been futile.
So, watch out for the possibility of a short-squeeze rally on gold in the coming days.
However, if the above conditions are not met and instead gold breaks $1800 support more decisively this time, then at that point we will have to drop our bullish thoughts on gold. We will cross that bridge if and when we get there. For now, I still think gold is headed higher.