Spot gold continued its upward trend on Tuesday, trading near a one-week high of $1,744 an ounce. As investors weigh volatility in Treasury yields and data showing economic recovery from the pandemic. Gold has rebounded from near its lowest level since June, while Treasury yields have eased slightly from recent highs, adding to the precious metal’s appeal.
On Tuesday, the International Monetary Fund released the main projections of its World Economic Outlook. The organization and the World Bank began a week of virtual spring meetings on Monday. In its report, the IMF said global GDP would grow at its fastest pace in 40 years after falling in 2020. The world economy is forecast to grow 6 per cent in 2021, up 0.5 per cent from its January forecast. Developed economies are forecast to grow by 5.1 per cent in 2021 and emerging market and developing economies by 6.7 per cent. The IMF said this reflected the impact of additional fiscal policy support in several large economies, as well as expectations that vaccination would lead to economic recovery in the second half of the year.
‘So far, the rise in U.S. market rates has been driven by positive economic prospects and vaccinations, which have tended to lead to portfolio inflows and lower dollar bond spreads in most emerging markets,’ the IMF said.
The Fed has said it will keep interest rates near zero until the U.S. economy reaches full employment and inflation is expected to exceed 2 percent for some time. But if central banks in the developed world suddenly show greater concern about the risks of inflation, the world could see a sudden tightening of financial conditions similar to the ‘downweight storm’ of 2013, IMF economists Philipp Engler, Roberto Piazza and Galen Sher wrote.
Technical Analysis: Analysts say the generally softer risk tone, coupled with the fall in Treasury yields, provides some support for gold. However, a strong recovery in demand for the dollar could keep bulls from making big bets and could limit gold’s gains. Gold bulls may now be looking to build momentum above the 4-hour chart 200-dma. This will be followed by the $1,744 – $46 resistance area, which if cleared decisively will be seen as a new trigger for bullish traders.
At the same time, technical indicators are gaining positive traction on the hourly chart, but the bullish bias is not yet confirmed on the daily chart. This, in turn, requires active bullish traders to be cautious before setting themselves up for further gains in gold/dollar.
As a result, any subsequent rally is more likely to meet solid resistance at previously strong horizontal support around $1,760-65. The above resistance is also a neckline for a bullish double-bottom pattern that should be a key inflection point for traders.
On the other hand, important support lies around $1,720. Then there is the round mark of $1,700, a level below which the constructive outlook is extinguished. Gold is likely to accelerate its decline and challenge multi-month lows around the $1,677-76 area.
Outlook: The week’s top macro events include the FOMC minutes on Wednesday, March 16, 17 and Fed Chairman Powell’s speech. These two factors are expected to drive market volatility this week.
Kyle Rodda, market analyst at IG, said: “The environment for gold is not very buoyant. “The continued rise in yields and the steady dollar on the back of continued strong US data have contributed to a sense that central banks are turning hawkish before the expected time.”
“Gold shrugged off the U.S. economic data over the Easter weekend and performed surprisingly,” Carsten Fritsch, analyst at Commerzbank AG, said in a note. The low of $1,680 set last week and in early March is a solid support point. However, gold may struggle to break through $1,760 an ounce.”
Stephen Innes, the chief global market strategist at Axi, said gold could extend its rally if it breaks above $1,750 an ounce. Still, ETF investors continued to sell gold, with holdings near their lowest level since May.