Gold Bulls Need a Fed Surprise or China Stimulus to Defy the Bearish Trend
- Gold faces pressure as US bond yields rise and the dollar strengthens.
- China’s stimulus efforts could offer potential support for the precious metal.
- Key support levels near $2645 and $2600 could signal further downside if broken.
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The price of gold was higher in the first half of Monday’s session, following a two-day sell-off at the end of last week. Unlike Bitcoin, which has just hit a new all-time high above $106K, the precious metal has been stuck inside a range lately.
The metal’s recent struggles underscore growing expectations of a not-so-dovish stance from the US Federal Reserve this week. We have seen continued strength in US dollar and bond yields have been on the rise again lately, with the United States 10-Year rising back to 4.40% last week.
Rising yields increase the opportunity cost of holding non-yielding assets like gold. Meanwhile, the crypto upsurge has also dampened demand for the safe-haven gold, as well as value stocks. So, unless the Fed surprises with a dovish cut this week, or China announces more stimulus measures, gold may continue to struggle in the near-term outlook.
China’s weak economy and Lunar New Year implications for gold
One potential source of support for gold could come from China, where top leaders have signaled stronger stimulus to help support consumer demand. The world’s largest consumer of gold is grappling with a struggling economy, as evidenced by weak data released last week and again this week.
The latest data released overnight showed retail sales growth weakened to just 3.0% year-over-year, sharply below the previous reading of 4.8% and well below the 5.0% expected. Industrial productio was in line at 5.4% y/y, while fixed asset investment was weaker at 3.3%. While further stimulus may support growth, it might not resolve deeper structural issues.
That said, announcements of significant measures could lift gold, particularly as the Lunar New Year approaches—a period marked by heightened jewelry demand for gift-giving traditions. Without it, jewelry demand looks set to be weaker this holiday season judging by the weak consumer data.
Gold technical analysis and trade ideas
The technical outlook on gold has not turned completely bearish yet for it continues to maintain its series of higher highs and higher lows. Still, the lack of any new highs since peaking at $2790 at the end of October means the bullish momentum that was prevalent in the previous months is no longer the case.
This makes gold a market for both the bulls and bears until a clearer directional bias emerges. With key resistance in the $2710-$2725 range holding last week, one could even argue that the short-term path of least resistance is now to the downside.
With that in mind, it is worth keeping an eye on gold’s support levels that have now come into focus. The first one is at $2645, marking the high from the price action that unfolded on Friday December 6. That’s when gold last provided a strong bullish signal in the form of a doji candle which then paved the way for a sharp 3-day rally. Gold has tested this level and has bounced. So far, so good. However, a potential close below this level would be a bearish signal.
If gold does break down and take out support at $2645, then this could potentially see the metal drop towards the $2600 and in doing so, take out liquidity below the recent interim low of $2613. The $2600 level marks the bullish trend line that has been in place since the summer. Below it, $2580 would come into focus which will then need to hold to prevent a slide towards the $2500 level.
In terms of resistance levels to watch, the $2710-$2725 range remains the most important zone, where gold has now twice found strong selling pressure from. Given that gold has moved and held below this level on the last two days of last week, we may not see another test of this level without the metal first staging a slightly deeper correction towards the levels mentioned above. Therefore, a more relevant resistance level to watch is at around $2675, making the low from the bearish-engulfing candle that was formed on Thursday.
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Disclaimer: This article is written for informational purposes only; it does not constitute a solicitation, offer, advice, counsel or recommendation to invest as such it is not intended to incentivize the purchase of assets in any way. I would like to remind you that any type of asset, is evaluated from multiple perspectives and is highly risky and therefore, any investment decision and the associated risk remains with the investor.
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