Gold Forecast: Investors appear dubious regarding ‘buying the dip’

Gold retreated for the third week in a row, hitting two-month low near $2,540.
The loss of the $2,500 mark could spark a deeper retracement.
A cautious Fed and the Trump-led rally in the US Dollar weighed on the metal.

The corrective move in Gold (XAU/USD) remained well in place for yet another week, this time revisiting the $2,540 region per troy ounce, or a fresh two-month low, where some initial contention zone appears to have emerged.

In fact, the pronounced move higher in the precious metal that kicked in with the new year seems to have met some decent resistance in the boundaries of the $2,800 mark so far. Furthermore, having gained around 30% from January to those peaks in late October, the yellow metal shed around 9% just in a couple of trading weeks in November.

An exclusive culprit: The “Trump-trade”

The metal fared pretty well during October, a month in which the US Dollar (USD) closed with gains in every single week on the back of expectations of a potential win by the Republican candidate Donald Trump.

Gold prices did even better and managed to extend the march north during last month despite quite a marked recovery in US yields across different maturity periods.

However, all turned upside-down for Bullion since the moment votes secured Trump a second term, this time as 47th US President.

In fact, the US dollar has regained a strong upside impulse since Trump’s victory, keeping the commodity complex as well as the risk-linked galaxy well under pressure. While the US Dollar Index (DXY), which tracks the Greenback versus a basket of direct rival currencies, advanced to fresh 2024 tops north of the 107.00 barrier, the precious metal embarked on a robust retracement to the vicinity of the key $2,500 mark, from where it has now attempted to rebound.

The main concerns hovering around the non-yielding metal include the likely implementation of tariffs on European and Chinese imports by the Trump administration in combination with looser corporate regulation and fiscal policy.

The takeaway is that these measures could permeate through the economy via inflationary pressure and, more likely than not, end up motivating the Federal Reserve (Fed) to alter its ongoing easing cycle. The potential degree of the acceleration of the consumer prices could even reignite the resumption of some tightening measures by the central bank.

Gold prices should remain supported by geopolitics

A key factor behind the surge in Gold prices has been ongoing geopolitical tensions, particularly the escalating conflict between Israel and Hamas, alongside the protracted war in Ukraine.

Every time there’s fresh news of worsening conditions in these conflicts, investors rush to safe-haven assets like Gold. Unfortunately, there’s no sign of these crises being resolved anytime soon, which should put a floor on further bouts of selling pressure hurting the precious metal.

Once again, President-elect Trump will have his say on the Russia-Ukraine crisis, as he pledged to “end” that war quickly.

To sum up, the prospects of the resurgence of inflation in the US economy and its direct impact on the Fed’s mind should keep Gold prices under the microscope but not rule out deeper pullbacks going forward. Once, and if, the looser fiscal policy and tariffs commence, it will come time to evaluate the extension and duration of those policies, allowing the yellow metal to start recouping part of the shine lost.

Gold daily chart

Gold technical outlook

Gold is on track to potentially revisit its recent low of $2,536 from mid-November. If prices dip further, the next targets could be the September low of $2,471 ahead of the key 200-day Simple Moving Average (SMA) at $2,397. If this zone fails to hold, additional downside could aim for $2,353 (July low), seconded by the June low of $2,286 and May’s low of $2,277. Breaking through these levels might pave the way for a deeper move toward the March low of $2,146 and possibly the 2024 bottom at $1,984 seen on February 14.

On the upside, resistance could come in at the 55-day SMA around $2,638. If Gold manages to rally beyond this, it might aim for the recent all-time high of $2,790 set at the end of October, with Fibonacci extensions of the 2024 climb at $3,009, $3,123 and $3,288.

Gold FAQs

Why do people invest in Gold?

Gold has played a key role in human’s history as it has been widely used as a store of value and medium of exchange. Currently, apart from its shine and usage for jewelry, the precious metal is widely seen as a safe-haven asset, meaning that it is considered a good investment during turbulent times. Gold is also widely seen as a hedge against inflation and against depreciating currencies as it doesn’t rely on any specific issuer or government.

Who buys the most Gold?

Central banks are the biggest Gold holders. In their aim to support their currencies in turbulent times, central banks tend to diversify their reserves and buy Gold to improve the perceived strength of the economy and the currency. High Gold reserves can be a source of trust for a country’s solvency. Central banks added 1,136 tonnes of Gold worth around $70 billion to their reserves in 2022, according to data from the World Gold Council. This is the highest yearly purchase since records began. Central banks from emerging economies such as China, India and Turkey are quickly increasing their Gold reserves.

How is Gold correlated with other assets?

Gold has an inverse correlation with the US Dollar and US Treasuries, which are both major reserve and safe-haven assets. When the Dollar depreciates, Gold tends to rise, enabling investors and central banks to diversify their assets in turbulent times. Gold is also inversely correlated with risk assets. A rally in the stock market tends to weaken Gold price, while sell-offs in riskier markets tend to favor the precious metal.

What does the price of Gold depend on?

The price can move due to a wide range of factors. Geopolitical instability or fears of a deep recession can quickly make Gold price escalate due to its safe-haven status. As a yield-less asset, Gold tends to rise with lower interest rates, while higher cost of money usually weighs down on the yellow metal. Still, most moves depend on how the US Dollar (USD) behaves as the asset is priced in dollars (XAU/USD). A strong Dollar tends to keep the price of Gold controlled, whereas a weaker Dollar is likely to push Gold prices up.

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