Is this the beginning of a major bullish reversal in the price of gold?

Up more than 5% on a week, the price of gold is recovering after falling to its lowest level of the year, below $1700 an ounce, on Monday last week. The ounce of gold has benefited from the falling dollar and now from falling U.S. long rates that are putting pressure on real rates.

U.S. bond yields have been under pressure since Friday, following the disappointing advance reading of the consumer confidence index. The index compiled by the University of Michigan unexpectedly fell to its lowest level since 2011.

The U.S. 10-year yield has since lost more than 10 basis points, while the 10-year inflation forecast has remained steady at 2.33%. As a result, the real yield on the U.S. 10-year bond has fallen to its recent low of -1.1%.

Naturally, faced with this deterioration in the attractiveness of Treasuries, investors are being pushed into TIPS and traditional precious metals like gold to protect their purchasing power.

That said, it is not yet clear whether the gold price is ready for a major bullish reversal to the all-time high of $2075 set last year.

A major bullish reversal would require a further decline in US real yields. The long-term inflation outlook is expected to remain stable around 2-2.20%, so the nominal yield would have to fall below 1% for the real rate to fall to a new all-time low, which seems unlikely given that the Fed is expected to begin raising rates in late 2022.

From a technical analysis perspective, the fundamental outlook remains bearish. Despite the significant rebound in recent days, gold prices have not broken through any major resistance.

July's resistance at $1834 will be the first technical threshold to watch. A breach of this resistance would be a technical signal that would end the underlying downtrend.

(Chart Source: Tradingview 17.08.2021)

However, only if the June high at $1916 is breached would the long-term technical outlook become bullish again. A breach of this resistance would form a bullish “double bottom” reversal pattern with a theoretical upside target of around $2,175.

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.