Gold Price Forecast: XAU/USD oscillates in a range as banking fears ease, US Dollar weakens

• Gold price trades in a range as sentiment improves but US Dollar weakens.
• Markets buoyed by bank takeovers and comments from Michael Barr that all "tools"will be used to support any institution no matter what size.
• Bearish patterns on 4-hour chart suggest risk of further downside to key 'make-or-break' support at $1,934.

Gold price trades in a tight range between the $1,950-60s during the European Session on Tuesday. It is currently pressing up against a confluence of overhead technical resistance at $1,960. The surge to over $2,000 last week on panic-buying as the banking crisis worsened seems to have been as short-lived as a distress flare from a castaway. 

Gold price lost ground as the market mood took a turn for the better at the start of the week on more failing-bank-takeover news, and as United States policymakers assured lawmakers that they have the “tools” necessary to stop any further banking sector contagion from spreading. 

A Barr to further contagion 

On Monday, markets took comfort and rallied from the news First Citizens Bank had bought up the assets of defunct lender Silicon Valley Bank (SVB) in a copycat deal of UBS’s adoption of flailing (No) Credit Suisse. 

Investors were further reassured by the early publication of Federal Reserve (Fed) Vice Chair for Supervision Michael Barr’s testimony to the Senate Banking Committee, which is scheduled for hearings about the banking crisis on Tuesday and Wednesday. Barr’s language was unequivocal, stating, “We will continue to closely monitor conditions in the banking system and are prepared to use all of our tools for any size institution, as needed, to keep the system safe and sound.”

US Dollar weakens providing support to Gold 

The US Dollar Index, which tracks the value of the Dollar against a weighted basket of counterparts, is down a quarter of a percent on the day, counteracting the downward pressure on XAU/USD. A fall in safe-haven flows to the Greenback combined with bets the US Federal Reserve will not raise interest rates at its next meeting are weighing down the USD. Higher interest rates generate more demand from the carry trade in which international investors borrow in a cheaply funded currency to invest in a currency bearing a higher interest rate. 

Of the three leading central banks – the Fed, ECB and BOE – the Federal Reserve is widely expected to be the first to begin cutting interest rates once peak rate is achieved, putting further pressure on the buck as it will be ahead of the curve. In addition, persistent concerns the US may be on the cusp of entering a recession as leading indicators waver, further weigh on the world's reserve currency. 

Edward Dowd, Founder of Phinance Technologies, and a former Blackrock Fund Manager, expects the US economy to enter a recession within months. The scenario he paints would probably increase safe-haven demand for Gold.

"Now, we are looking for a hard recession, hopefully nothing systemic like the Great Financial Crisis, but that remains to be seen."

A sharp fall in the M2 Money Supply is one of the canaries in the coal mine that could indicate a coming recession.

"What happened in November 2022 was very grim, the Money Supply M2, Year-over-Year growth rate went negative. And why is that important? That has only happened 5 times since 1868, including this time. The last time it occurred was in 1930, the Great Depression. This is a big deal and an indication Credit is contracting at a very fast pace," said Dowd, in an interview with Kitco.com on March 25. 

Another recession-warning red flag is the decline in short-term funding rates represented by the 3-month T-Bill below the Fed's Discount Rate, which is the rate it lends directly to commercial banks.

"Now, since the banking crisis with Silicon Valley Bank and others, the 3-month T-bill is trading below the Discount rate. So, there is a flight to safety and quality… People are getting ready for a storm. That’s what the markets are telling us.”

Only six US banks will remain by the year 2025, according to Dowd's thesis, and, "I see an emergency Fed rate cut within the next 3 months," he added.

The terminal rate debate

US Treasury bond yields are rising conversely, in a rare uncoupling from the US Dollar Index, suggesting other currencies are relatively stronger, perhaps, on more hawkish outlooks for their central banks. Yields impact Gold price as they reflect interest rate expectations and the opportunity cost of holding the bright metal, which is a non-yielding asset unlike cash deposits or bonds. 

Yields rose sharply on Monday and are continuing their uptrend, though more gently, on Tuesday. The rise could be put down to investors taking heart from the positive news about the banking crisis being in the rear view mirror. This is leading them to price in the possibility that the US Federal Reserve would continue raising interest rates in their fight with inflation. 

The yield on the benchmark 10-year US Treasury bond rose a stonking 4.65% to 3.53% in one day on Monday as market expectations flipped back to expecting the return of an aggressive Fed. It is currently trading at 3.55 up half a percent on the day. 
   
Whilst yields may be signalling more rate hikes from the Fed, another barometer of the Fed’s future course of policy, the Fed Fund Futures Curve, is stating the opposite, indicating the probabilities continue to support the Fed pausing at their next meeting in May – and even a chance of three 0.25% rate cuts before the end of the year, suggesting rates may have already reached their terminal peak. 

The divergence may explain Gold’s current lack of a strong directional move, and the fog needs to lift on the real state of the financial system before investors can start to get a clearer view of the Fed’s future plans.

Uptrend still intact as long as Gold holds above $1,934

From a technical perspective, Gold price may be describing a three-wave measured move pattern similar to a zig-zag pattern, starting from the $2,003 highs. In such moves, waves 1 and 3 are often of the same length or a Fibonacci ratio of one another. It suggests XAU/USD could fall all the way to support at the $1,934 March 22 lows, which may also be the neckline of a bearish double top pattern.

Gold price: 4-hour Chart

If the price fullfills its target based on the length of the measured move, it could even push below the neckline and begin a sharper decline down to a target at around $1,900. 

Using the height of the double top as a guide we might even see a deeper sell-off to support at around $1,880 supplied by the 200-4hr Simple Moving Average (SMA). 

The Relative Strength Index (RSI) momentum indicator is falling more quickly than price, reflecting underlying weakness through a bearish divergence. This further supports the more negative outlook. 

Alternatively, a decisive break and close above $1,960 would negate the near-term bearish picture.

Despite the bearish patterns forming on the 4-hour chart, XAU/USD remains in a medium-term bullish trend on the daily chart, and given the trend is expected to extend, the bias overall remains to the upside, suggesting the current bearish milieu may be corrective rather than trending in character.