Source: IG Charts
Gold Fundamental Outlook: Bullish
- Gold[1] suffers worst week in 5 months, is this a new trend?
- Rising longer-dated government bond yields a key culprit
- Short-term view may still favor the upside on cheap credit
Gold prices wobbled this past week, dropping 5.72 percent on Tuesday in what was the worst performance over the course of 24 hours since 2013. At one point, XAU/USD[2] temporarily wiped out all progress it made over the last 3 weeks in a span of two days. It was the worst week in 5 months. Such volatility ought to serve as a reminder for traders of gold’s relative inferiority when it comes to liquidity compared to fiat currencies.
Gold’s performance this past week could be a foreshadowing of what the yellow metal might eventually succumb to in the medium term. Longer-dated government bond yields from developed nations rose aggressively last week. On average, the 10-year yield from the US, Germany, Japan and Australia climbed to its highest since late June.
This could be a combination of rising inflation expectations and an improving outlook for economic growth down the road. Eventually, when interest rates start rising again from near-zero levels, the appeal of gold may start to decline. But that is down the road. In the short run, XAU/USD could remain elevated as central banks[3] refrain from raising borrowing costs.
In the near term, sudden and aggressive risk aversion could accelerate declines in gold. This is similar to what was witnessed earlier this year when global equities tumbled amid the coronavirus outbreak. That is when the haven-linked US Dollar[4] aggressively appreciated as the world’s reserve currency. With that in mind, what are some fundamental risks XAU/USD could encounter ahead?
Rising
