Gold stabilizes after bouncing off 100-day moving average

• Gold bounces off technical support aided by the US Dollar, which peaks and rolls over. 
• The precious metal faces headwinds from the outlook for US interest rates and Trumponomics. 
• The US economy is in “remarkably good” shape, according to Fed Chair Powell, lifting the USD and weighing on Gold. 

Gold (XAU/USD) trades little changed on Friday, holding steady in the $2,560s after making a slight recovery from the two-month lows reached on the previous day. 

A stronger US Dollar (USD) continues to put pressure on Gold since it is mainly priced and traded in the US currency. Sticky US inflation and positive labor market data, as well as upbeat comments from the Federal Reserve (Fed) Chairman Jerome Powell, led the US Dollar Index (DXY) to a new year-to-date high on Thursday, piling further pressure on the yellow metal. 

Gold slumps on strong USD, Republican “clean-sweep”

Gold extended its decline, breaking below a major trendline and reaching new lows in the $2,530s on Thursday, after a combination of higher US factory-gate inflation data, lower US unemployment claims data and upbeat commentary from Fed Chairman Powell. 

Powell said the Fed would not need to not take such an aggressive approach to cutting interest rates given the US economy was doing “remarkably well”. The comments were negative for Gold, which, as a non-interest-paying asset, tends to outperform when interest rates are lower. 

US Retail Sales data, scheduled for release on Friday, could further stir the pot in terms of the outlook for the US economy, the US Dollar and Gold. If the data comes out higher than the 0.3% increase expected, it could lift the USD even higher, putting further downside pressure on the precious metal.

The news that the Republicans had crossed the threshold for gaining a majority in the US House of Representatives, and the fact they already control the US Senate and the White House, further weighed on Gold. 

Control of the legislature will mean President-elect Donald Trump and his party will be able to push through their economic policies with less friction. These, whilst expected to be inflationary and therefore potentially positive for Gold – a traditional “goto” inflation hedge – could also be bearish for the precious metal because it could force the Fed to keep interest rates elevated. 

Another reason for Gold's relatively rapid decline in November are outflows from large hedge funds, who rode the bull wave higher in October as Gold peaked at a record high of $2,790. Many of these funds use trend-following techniques and Gold’s recent declines could be flashing warning lights about the sustainability of the hitherto rock-solid uptrend.

Gold Exchange Traded Funds (ETFs), which allow investors to purchase “stocks” in Gold – enabling them to hold the commodity without actually purchasing the physical commodity – have also seen outflows, according to the World Gold Council (WGC). Gold ETFs shed around $809 million (12 tonnes) net in early November, driven by North American outflows and partially offset by Asian inflows. 

Meanwhile, geopolitical risks remain elevated, providing some underpinning support for Gold as a popular safe-haven asset. That said, US efforts at negotiating a ceasefire in Lebanon were said to be showing “tentative signs of progress,” according to a Reuters report on Friday. 

Technical Analysis: XAU/USD finds support at 100-day SMA

Gold bounces off its (blue) 100-day Simple Moving Average (SMA) and attempts a recovery. Still, the precious metal is in a short and probably medium-term downtrend. This, given the principle of technical analysis that “the trend is your friend,” favors a continuation lower. 

XAU/USD Daily Chart

Gold formed a bullish Hammer Japanese candlestick pattern on Thursday after touching support at the 100 SMA. However, it will require confirmation from a green bullish candle on Friday to indicate a near-term reversal. Currently, the price is trading flat.

Given the overarching downtrend, a break below the $2,530 August highs would probably indicate an extension of the trend lower. The next downside target lies in around the $2,470s, followed by $2,400, where the (green) 200-day SMA is located. 

The precious metal remains in an uptrend on a long-term basis, raising the risk of a reversal higher in line with its broader upcycle.