Gold has been able to maintain its high value since the surge of COVID-19. Even as pandemic risks subside, and real yields and central bank rates rise, gold continues to receive support from geopolitical risks, potential U.S. shutdowns, and the accumulation of debt. Although debt risks are expected to persist over the long term, many factors supporting gold are not as relevant as before.
However, with the hiking cycle coming to an end, the upward pressure on gold is now driven by expectations of future rate cuts. The markets anticipate rate cuts from the Federal Reserve in the first half of 2023. This optimism may be somewhat unfounded because inflation has shown that it is persistent in this cycle. On the other hand, considering that households now have less to spend and the downward pressure on oil prices is expected to increase towards 2024, certainly contributes to this sentiment.
Unemployment is at historically low levels, and new jobs data remain robust. The U.S. economy grew by over 5% in the third quarter. The persistence of inflation could temper optimistic expectations in the coming months and slow the decline of the dollar index if growth remains above or near average and unemployment stays low.
(XAUUSD Weekly Chart)
With the support of the earlier rate cut expectations, gold is now testing the 2050-2075 zone for the fourth time. This is a key resistance for gold over the long term, and as long as it holds, upward moves may create selling opportunities for swing traders.
However, gold sometimes likes to make spikes before falling, and if that happens once more, a trap towards 2150 is within the realm of possibility. The challenging aspect for traders will be to determine whether it will be a breakout from a three-year-long resistance or just a usual trap to stop out bears and lure bulls before falling again. To gauge this, more daily closes above the 2050-2075 zone mean a better chance of a real breakout.
(XAUUSD Weekly Chart)
In the more immediate term, gold is moving in a perfect uptrend. After testing the 2050 resistance, the pattern turned flat within the trend channel, ranging between 2035 and 2050. If 2050 continues to hold, the 2035 support might weaken, and the trendline could face another test. A break below 2035 could lead the gold price towards 2020 (Fibonacci 23.6% and the lower line of the trend channel) first, then towards 2005, which could serve as a more significant support in the short term or even the medium term, signaling a reversal from the 2050-2075 resistance.
