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Gold’s Long-Term Bullish Trend Still Intact Despite Recent Pullback

Published 25/03/2024, 10:45
  • Gold's strong trend weakened due to a strong US dollar, causing mild bearish price action.
  • Dollar's strength, driven by external factors and positive US economic indicators, weighed on gold.
  • Despite short-term setbacks, gold's long-term trend remains bullish, with potential for record highs in the future.
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  • The strong trend for gold unravelled somewhat at the back end of last week thanks to a strong US dollar. As the metal retreated from the record high it had hit earlier in the week, it formed some mild bearish price action in the process, denting its short-term technical outlook.

    However, while it suffered a bit of blow in the short-term, there’s no doubt in my mind that its long-term trend is still bullish and that prices could be heading to a record in the not-too-distant future.

    Dollar Strength Weighs on Gold

    As well as profit-taking, the US dollar was also responsible for gold’s weakness in the second half of last week. For gold to rise to new highs, the greenback will need to start trending lower again.

    Last week saw the Dollar Index recover to close in the positive. Despite the Federal Reserve maintaining a dovish stance, the dollar strengthened, buoyed by external factors such as the surprise rate cut by the Swiss National Bank and dovish holds from the Bank of England and Reserve Bank of Australia.

    Declines in the pound, Aussie dollar, and euro further supported the dollar's rise, alongside positive US economic indicators like the latest PMIs, existing home sales, and jobless claims. Nevertheless, these indicators are unlikely to deter the Fed from considering rate cuts in June, especially if inflation remains low.

    Looking ahead, the upcoming economic calendar appears relatively calm after recent volatility driven by major macroeconomic releases and central bank meetings. Attention will shift to the Fed's favorite Core PCE Price Index on Friday, followed by the Non-Farm Payrolls (NFP) report and Consumer Price Index (CPI) data in the following weeks.

    The March US data, slated for early April release, holds significant influence over the dollar's trajectory. Weakness in these figures, particularly in forthcoming inflation data, could lead to a sustained dollar decline, providing support for gold.

    Gold Technical Analysis and Trade Ideas

    Gold Daily Chart

    With gold recently breaking out of a multi-year consolidation pattern to the upside, the long-term trend direction is unmistakable, though the short-term outlook appears a little murky as prices retreated from severely overbought levels.

    The precious metal has established multiple higher lows and higher highs before reaching new record highs last week. An end of this sequence would mark a shift to a bearish outlook from a longer-term tactical standpoint. The most recent higher low occurred in February at $1984, making this level the threshold to signify the conclusion of gold’s long-term bullish trend.

    Until that happens, any short-term weakness we see in the interim will not significantly weaken the long-term technical outlook. In fact, many people who missed the opportunity to buy gold before it broke out, will be looking to pick the metal up on any short-term dips.

    With that in mind, it is important to watch former resistance levels closely for potential fresh ‘buy’ signals.

    Old resistance levels could potentially transform into support upon retesting from above in the ensuing days and weeks, considering the prevailing bullish trend. Among these, the range between $2075 to $2081 holds significant importance, having served as a strong resistance zone in 2020, 2022, and on multiple occasions in 2023. This zone has now transitioned into the most crucial support area to monitor.

    Ahead of that critical juncture lies another important pivotal level around $2146, which marks the December 2023 high. Active traders will be using this level as the main reference point for short term directional trades.

    While gold holds above it, the bears may remain largely on the side-lines, as they will be seeking a lower low to give them some confirmation before selling gold. However, if this level breaks, then we could see the onset of a larger correction, potentially towards that long term key support area in the range between $2075 to $2081. Such a pullback would present a great opportunity for bullish traders who would be looking to load up on gold again, in my opinion.

    Regarding key resistance levels to watch from here, well there are only few prior reference points given that gold has only recently achieved a record high. Among them, the area around $2195 could be one where gold couldn’t hold above when it broke to a new record high last week. The record high itself at $2222 is the subsequent bullish target.

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