Gold is struggling this week as the oil price is back above $100 per barrel and as bond yields surge globally. The rise in government borrowing costs is a big problem for an asset like gold because it does not yield anything, and becomes less attractive when yields rise elsewhere.
This means that the big picture for gold is that for as long as energy prices are rising, inflation increases and the market is pricing in an aggressive interest rate hiking cycle around the world, the gold price is likely to struggle.
However, if you drill down a bit deeper, it is impressive that even with these downside risks the gold price has managed to stay above $4,000 oer ounce. This is a critical support level that has held extremely well, and it suggests that there remains solid demand for gold, even if the road is bumpy in the short term.
On a longer term basis, the gold price remains in an uptrend, although it is having a rough time in the short and medium term and is lower by 10% in a month. Ahead of the $4,000 support level, it is worth watching $4110, which is a key support now that the gold price has slipped below $4,200 per ounce.
Although some analysts still believe that gold could go back to $5,000 per ounce, we think that the only way for the gold price to stage a meaningful recovery is for the dollar to fall. A return of the dollar debasement trade would boost the price of gold in our view. However, even though US Treasuries have fallen sharply and experienced their worst quarter since 1994, the dollar is higher by 2.5% in the past month, and continues to attract safe haven flows.
If the sell off in gold continues, short term support levels to watch include $4110, $4,000, and a deper sell off could see the yellow metal fall to $3985, the low from mid-June.
If the oil price eases significantly, or if there is a decline in the dollar, then we may see a short term recovery in the price of gold, and initial resistance lies at $4,200, and then $4,300, prior support from earlier in September.
Chart 1: The gold price, 1-month chart
Source: XTB. Past performance is not a reliable indicator of future results.
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