Gold Extends Rally, Buoyed by Falling Yields and a Weaker Dollar | Daily Market Analysis

Key events:

UK - Construction PMI (Sep)

Eurozone - ECB Publishes Account of Monetary Policy Meeting  

USA - Initial Jobless Claims

Canada - Ivey PMI (Sep)

Gold and especially silver prices lost some of their gains from the impressive rally of the last week and a half early today. What was the reason? The U.S. dollar and bond yields rebounded after pulling back in recent days following central bank interventions designed to stabilize markets and weak U.S. data that fueled speculation of an early Fed rate hike. Is that the end of the gold and silver rally? Or will drawdown buybacks, which didn't manage to take part in the growth and now will make use of lower prices, have their say?

Investor sentiment has turned positive in recent days after weaker-than-expected manufacturing and employment data in the U.S. sparked speculation that the Fed may stop hiking interest rates sooner than expected.

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In addition, the Bank of England, the Bank of Japan, and the People's Bank of China intervened in the markets in one way or another, and the Reserve Bank of Australia decided not to raise rates as much as expected. In other good news for gold, the World Gold Council said the world's central banks increased their net gold holdings for the fifth straight month in August.

The big rally in the long-term downtrend means that gold has clearly become overbought on the shorter timeframes after such a strong bounce. Therefore, today's weakening can partly be attributed to profit-taking by the bulls. It is also possible that the "bears" controlling the market for most of this year is also starting to show activity. As you can see in the daily timeframe, prices are testing the resistance around $1725-$1730.

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If the bulls want to continue rising, they have to take out the $1700-$1705 area, which was the base of Tuesday's breakout and the support/resistance zone. A successful defense of those lines could create an opportunity for a new advance during the week in light of the bullish reversal in various asset classes.

As noted, gold prices pulled back today amid a rebound in bond yields and the dollar after disappointing macro data in Europe and before the release of US employment and service sector PMI data from ISM. In addition, a strong recovery in oil prices has renewed concerns about the energy crisis and a prolonged cold winter in Europe.

In the long term, gold prices should rise. On the other hand, rising interest rates so far continue to provoke sales of this precious metal. And since the rate situation has not changed much, analysts tend to think that the current breakout attempt will be a false one, not a real one. Therefore, it seems that we should now be wary of a breakout downward.

From a bearish point of view, a breakout below $1700 would mean another failed upside breakout attempt. If that happens, prices might end up falling quickly to the next potential support at $1675/6, with the 2021 low at $1676. If the bulls lose control of this area as well, they could capitulate. In that case, prices would likely target a retest of the September lows at $1614.

So there are plenty of options, and convincing arguments can be made in favor of both the bulls and the bears. But let's wait until the market decides on the direction, and traders can take advantage of the breakout, whichever direction prices decide to go. As was indicated earlier, a breakout downward is the most likely, but we should not dismiss any of the existing scenarios. The market may have already fully considered the future interest rate hikes and other risks in the quotes.