Gold is finding it increasingly difficult to stick to uptrend

Gold is finding it increasingly difficult to stick to uptrend

Over the past week, gold traded within a range of just over 3%, which could be described as a lull given the current geopolitical climate. Perhaps even more puzzling is the increase in sales as prices rose, which, at first glance, does not fit the narrative of gold serving as a safe haven for capital during periods of instability.

Gold’s muted reaction to the armed conflict in the Middle East is due to the rise in the dollar and Treasury bond yields. Pressure on the precious metal comes alongside diminishing prospects of a Fed rate cut and growing expectations of policy tightening by other major central banks in response to the oil shock. For now, we see this not as a calculated move, but as a direct reflex on the part of speculators. For the time being, they are set on seeing central banks battle to meet their inflation targets, which is logical given the recent painful inflation shock of 2022.

The idea here is that central banks will not repeat the same mistake so soon. However, we must remind ourselves that central banks can easily cast aside inflation targets and resort to monetary easing and other unconventional tools at the first signs of a liquidity crisis. Such hopes create significant growth potential in the medium term, but it is still worth waiting for such signals.

Leaving speculation aside, the price of gold is at very high levels by historical standards, and this remains a good time for major players to gradually take profits from the rally over the past two and a half years.

The 50-day moving average has served as an important support level over the past two years, currently hovering around $4,950. A break below this level at current prices, following such a remarkable rally in recent years, could trigger a sustained decline lasting several months, as seen in 2022 or 2020. However, we still consider the main scenario to be a reversal into a bear market, as in 2011, following a similar multi-year rally.

By the FxPro Analyst Team