Gold Price Forecast: XAU/USD clings to gains above $1,750, upside seems limited

Update: Gold gained some positive traction on the last trading day of the week and recovered a part of the overnight slump to the lowest level since August 11. The XAU/USD maintained its bid tone through the early European session and was seen hovering near the top end of the daily trading range, around the $1,754-55 region. Uncertainty lingers about potential risks from the debt crisis at China Evergrande Group kept a lid on the recent optimism. Apart from this, a more hawkish tilt from major central banks dampened investors' appetite for riskier assets. This was evident from a cautious mood around the equity markets, which, in turn, was seen as a key factor that acted as a tailwind for the safe-haven XAU/USD.

The commodity, for now, seems to have snapped two days of the losing streak, though any meaningful positive move still seems elusive amid prospects for an early rate hike by the Fed and the BoE. This was reinforced by the ongoing surge in sovereign bond yields, which should hold bulls from placing aggressive bets around the non-yielding yellow metal. In fact, the yield on the benchmark 10-year US government bond shot back above the 1.4% threshold for the first time since July. This helped revive the US dollar demand, which might further collaborate to cap the upside for the dollar-denominated commodity.

Hence, it will be prudent to wait for a strong follow-through buying before confirming that gold has bottomed out in the near term and positioning for any further gains. Market participants now look forward to Fed Chair Jerome Powell's scheduled speech later during the early North American session. This, along with the bond yields and the broader market risk sentiment, could produce some trading opportunities around gold.

Previous update: Gold prices print more than 0.50% gains on Friday after posting a single-day fall of more than $30 in the US session. The prices fell around 1% on Thursday, the move sponsored by the higher US dollar following the US Federal Reserve's plan on reducing stimulus as soon as November. Gold is headed on track for a third consecutive week of declines.

The US Dollar Index, which tracks the performance of the greenback against the basket of six major currencies, droops near a one-week low on Friday, making the precious metal cheaper for other currencies holders. The greenback came under selling pressure tracking the pessimistic US economic data.

The US Initial Jobless Claims rose unexpectedly in the week ending on September 18 at 351K. But the market assessed that the underlying trend remained consistent as it showed a steady recovery of the labor market.

The US Federal Reserve lowered its growth estimates for 2021 and raised the inflation forecast but insisted tapering could begin as soon as November and end next year but also stated that the door is open to more stimulus if the economy needs it. The Central bank downgraded its Gross Domestic Product (GDP) growth projections for 2021 to 5.9% from 7% and also hinted interest rate hikes could occur earlier than expected.

Gold is generally considered a hedge against inflation and currency volatility. A Hawkish move by the Federal Reserve would diminish gold’s appeal. If the Fed raises interest rates this would increase the opportunity cost of holding the bullion, which pays no interest.

Asian stock market remains cautious on the fate of debt-ridden China’s Everngradne and its ripple effect on the global stock market, which is supporting the gold prices near the lower levels.

Technical levels

Gold prices have been trading in a broader range of $1,750 and $1,830 since late June. XAU/USD touched the low of $1,687.78 on August 9 after breaking the range shortly. The prices trade below the 20-day Simple Moving Average (SMA) at 1.801.35, which is confirming the downside pressure on the gold.

XAU/USD daily chart

The Moving Average Convergence Divergence (MACD) holds below the midline with a bearish crossover. Any downtick in the MACD indicator would amplify the selling pressure and the prices would approach the low made on August 11 at $1,724.18. A daily close below the $1,720 horizontal support level would entice bears to retest the levels last seen in April. XAU/USD bears could meet the April 1 low at $1,705.84.

Alternatively, if price sustains above intraday high, it could retrace back to the $1,770 horizontal resistance level followed by the high made on September 22 at $1,787.35. A daily close above the 20-day SMA would mean the psychological $1,800 for XAU/USD.

XAU/USD additional levels