(Kitco News) - Growing fears over the size of U.S. government debt have ignited a new U.S. dollar debasement trade that has driven gold back above critical resistance levels; however, analysts are warning investors that the market is looking a little overbought after seeing a 15% rally through August. (Kitco Global Index shows how much of today's gold move is the dollar versus the gold market itself.)
In a recent note, Fawad Razaqzada, Market Analyst at FOREX.com, said that despite the bullish momentum from the debasement trade, the U.S. Treasury Department’s announcement that it would buy long-dated bonds to reduce borrowing costs is starting to stabilize the long end of the yield curve.
“We have seen a bit of give-back in that trade, with investors welcoming, although not-so-warmly, the US Treasury’s decision to up its long-dated bond buying to effectively lower rates and suggestions that there is more in their tool kit to hammer down yields,” he said. “Thus, the question now is will we see some unwinding of that dollar debasement trade, given that yields have moved slightly lower, even if it has been a struggle?”
However, Razaqzada added that unless there is a meaningful decline in long-term bond yields, investors could see dips in gold as buying opportunities.
Despite some modest selling pressure, gold prices continue to trade around initial resistance at $4,600 an ounce. Spot gold last traded at $4,601.60 an ounce, relatively flat on the day.
Looking ahead, he said that gold’s technical outlook could play an important role in the next price move. He added that despite the recent profit-taking, gold bulls are still in control of the market.
“The price of gold has hit an important resistance area between $4,655 to around $4,700 area. Back in May, this is where the last selling phase began. Now that gold has arrived back in this zone, we have already seen a bit of selling pressure. The question now is whether there will be more selling to come, or whether this is just a pause before gold breaks higher again,” he said.
“The recent structure is certainly bullish, with price having broken above the 50- and then the 200-day moving averages, as well as lots of short-term resistance levels. Some of those broken levels could turn into support, or perhaps not. It is important to observe what gold does when and if it comes down to retest some of these levels. Failure to bounce could be a sign of trouble for the bulls.”
Looking at key support levels, Razaqzada said that the first level he is watching is around $4,515, a prior resistance point that is also close to the 200-day moving average, while the next major support level is near $4,400 an ounce.
“If these levels fail to offer much in the way of support, then watch out below,” he said. “But the burden of proof lies with the sellers, having lost control of price action ever since they failed to push gold decisively below the key $4,000 long-term support level.”
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