Gold Starts Busy Week on Front Foot, but Short-Term Risks Lurk for Bulls

Gold and silver kicked off the new week on the front foot, with the former rising above $2030 and the latter reaching $23.00 by early European trade.

The yellow metal will be looking to avoid a hat trick of weekly losses after starting the year on a negative note.

Looking at the longer-term trend, however, there’s no doubt that gold is in a long-term bullish trend. The precious metal had ended 2023 on the back of three months of gains in Q4, climbing, albeit briefly, to a new all-time high in December.

Still, it remains to be seen whether the short-term drift will align with that longer-term trend any time soon.

This week’s key US data and central bank meetings certainly have the potential to move the metal decisively – potentially and more likely to the downside.

Along with the recent trend, gold prices fell modestly last week, although still held above key support in the $2000 area. The precious metal has struggled so far this year, because of three main factors.

Firstly, it has fallen behind thanks largely to a positive risk tone across financial markets, with the major US indexes hitting fresh all-time highs.

Investors have been piling into the racier technology sector in favor of haven assets like gold or yen.

Secondly, the US dollar has also been on the rise with the Dollar Index climbing in three out of the four weeks of the year so far, putting pressure on some dollar-denominated assets like gold and silver.

The only week the DXY didn’t rise was when it finished flat. Last week’s gains for the greenback were modest, as the DXY held below the 200-day average and key resistance around 103.50.

The slowing trend of the US dollar rally is perhaps why the precious metal has started this week on the front foot.

The third reason for gold's struggles this year is investors extending their rate-cut expectations, leading to rising bond yields.

This, in turn, elevates the opportunity cost of holding zero-interest assets like gold compared to interest-bearing alternatives such as bonds and dividend-paying stocks.

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These factors have offset haven demand for gold arising from the growing tensions in the Middle East, and expectations that we have seen peak interest rates across the globe, which is what drove the precious metal to a new all-time high in December.

This – expectations over interest rate cuts – is something I expect will keep gold underpinned on any short-term dips this year.

Gold’s early strength may once again fade this week, as the dollar is largely holding its ground against other currencies.

The robust US economic growth is allowing the Federal Reserve to ease up on immediate rate cuts.

Wednesday's FOMC meeting might see the Fed maintaining a firm stance against excessive dovishness, though convincing the markets could be a challenge.

The US Treasury's Quarterly Refunding announcement is another key point of interest, with attention on their potential issuance at the longer end of the curve.

There is a risk therefore that we might see higher US Treasury yields and potentially a weaker gold as a result.

Additionally, quarterly earnings reports from a few of the 'Magnificent Seven’ technology firms this week might keep investors focused on equity markets rather than gold, particularly if the tech rally continues.

The week concludes with the monthly non-farm payrolls report.

Continued strength in recent labor market data, supporting the Fed's cautious stance on rate normalization, could serve as another factor restraining gold in the short term.

But there’s no doubt in my mind about gold’s longer-term bullish view.

As we head deeper into the year, it is likely global inflationary pressures will continue to diminish, paving the way for the commencement of interest rate cuts.

The European Central Bank, Bank of England, and the Federal Reserve are all expected to initiate this process, possibly as early as the start of the second quarter.

However, a more plausible timeline might be later in the year due to the relatively hawkish stance maintained by several officials from these central banks and concerns about sticky inflation in Europe.

The Fed has outlined plans for three rate cuts in 2024, with the actual timing and magnitude contingent upon incoming data.

Just as the price of gold experienced a boost from the anticipation of rate cuts in 2023, we may witness similar gains in 2024 once central banks begin to implement more accommodative policies, leading to further declines in yields.

Given the heightened inflation observed in recent years and the erosion of value in fiat currencies, there is considerable pent-up demand for gold. As a perceived true store of value, gold is likely to find support on short-term pullbacks.

The current state of gold’s technical stance would not excite many traders, as it continues to remain inside a holding pattern, despite its stronger start to the week.