Gold Benefits From Fragility, Inflation Risk, and Defensive Rotation
Gold (XAU) remains the defensive part of this setup. The market is under threat from inflation pressures, fiscal pressures, geopolitical risks and financial fragility. These circumstances lead to a demand surge for gold as a safe haven.
But the gold price could come under pressure in the short term due to rising Treasury yields and a strengthening U.S. dollar. An increase in yields increases the opportunity costs of holding gold. A higher dollar price also provides a higher price for foreign buyers. This can dampen the upward momentum if investors are concerned with interest rates.
The long term picture for gold remains bullish. Inflation has not yet been under control. Oil prices could keep climbing if the Iran situation persists and shipping through the Strait of Hormuz remains curtailed. Fiscal deficits are still large. These forces are serving as a sustaining demand for hard assets.
From a technical perspective, the correction in the spot gold price from the $5,600 area is due to profit-taking at the strong resistance level. This resistance is defined by the ascending channel pattern, which was stretched from the bottom of the August 2018 lows.
On the other hand, the formation of an inverted head-and-shoulders pattern from August 2020 to February 2024, and then the breakout above the $2,100 level, indicates that gold prices have formed a long term bottom. This correction will likely offer strong buying opportunities for the next leg higher.
From the technical charts, there are only two levels that point to the possible bottom formation. The first level is $4,100 and the second is $3,600. Any correction back to these levels will likely form the bottom in gold prices and push prices toward the $6,000 to $7,000 level in the medium term.