Daily Market Recap – Gold reaches a 3-month high as lower rates and weakening dollar support prices

Gold prices are being supported by a weak dollar, subdued central bank commentary, and lower government bond yields around the world. However, gains in metals have been limited as rising equities have reduced demand for precious metals.

The drop in global government bond yields on Monday was supportive of yellow metal prices. The 10-year T-note yield fell to a one-and-a-half week low of 1.594% on Monday, the 10-year German bund yield fell to a one-and-a-half week low of -0.146%, and the 10-year British gilt yield fell to a one-and-a-half week low of 0.804%.

In addition, central bank comments on Monday supported precious metals. Fed Governor Brainard said that inflation expectations remain “extremely well anchored” and that inflation should begin to decline later in the year as “base effects” fade. Similarly, ECB Vice President Guindos said the ECB's June policy decision would depend on the data, but that “we need to maintain very accommodative monetary policy conditions.”

An acceleration in the pace of bond purchases by the BOE is supportive of demand for gold as a store of value after the BOE increased its asset purchase facility by +0.4% to a record 823.6 billion pounds in the week ending May 19.

The latest economic figures point to a continuation of the accommodative central bank policy. The Chicago Fed's National Activity Index fell from 1.47 to 0.24, which is weaker than expectations of a decline to 1.20.

Gold is benefiting from underlying support from the Covid pandemic, which is dovish for central bank policies. Meanwhile, the health situation in India weighs like a sword of Damocles on global growth.

From a technical perspective, gold has been in an uptrend since breaking above the 1,760 USD resistance turned support level. Prices are moving above the 13 and 34- day ascending moving averages. The crossing of the 200-period moving average confirms this bullish reading.

The yellow metal could return to the annual highs at 1,960 USD but will have to face a strong test at the 1,900 psychological level. The overbought RSI indicates a possible overheating which could trigger some degree of mean reversion. This is confirmed by the price gap with the 34-period moving average.

(Chart Source: Tradingview 25.05.2021)

A horizontal consolidation or a return of prices to the two moving averages at 34 and 200 periods around 1,860 are not to be ruled out in the near term. That said bears will have to wait for a move below 1,840 as a clear sign of a return to bearish dynamics.

Disclaimer: This material has been created for information purposes only. All views expressed in this document are my own and do not necessarily represent the opinions of any entity.