Gold Price Weekly Forecast: Retreating US yields, escalating tensions point to further gains

• Gold gained more than 4% this week boosted by safe-haven demand.
• Geopolitics, action in bond markets could drive XAU/USD’s action next week.
• Gold could encounter stiff resistance in the $1,925-$1,930 area.

Gold capitalized on safe-haven demand amid escalating geopolitical tensions and gathered bullish momentum to start the week. As US Treasury bond yields turned south on dovish Federal Reserve (Fed) expectations, XAU/USD extended its rally and snapped a two-week losing streak. Next week’s economic calendar will not offer any high-tier data releases that could impact the pair’s action in a noticeable way. Hence, market participants will remain focused on comments from Fed officials, the action in bond markets and geopolitics.

What happened last week? 

Israel formally declared war and launched a military operation against the Palestinian militant group Hamas following an unprecedented attack on Israel on October 7. Gold attracted buyers as a traditional safe-haven asset following the attack and XAU/USD rose 1.6% on Monday, registering its biggest one-day gain since early May.

US bond markets opened on Tuesday after a long weekend and the benchmark 10-year US Treasury bond yield quickly declined below 4.7% from the multi-year high it set near 4.9% on Friday. In turn, Gold held its ground and stabilized near $1,860.

As investors started to price in a no change in the Fed policy rate for the rest of 2023, US T-bond yields continued to push lower, allowing XAU/USD to build on the weekly gains and reach a two-week-high above $1,880. Atlanta Fed President Raphael Bostic said that the Fed doesn’t need to increase rates anymore, arguing that the policy was “sufficiently restrictive” to bring inflation back to the 2% target. San Francisco Fed president Mary Daly said that tight bond yields could be the equivalent of another rate increase. Similarly,"if long-term interest rates remain elevated because of higher term premiums, there may be less need to raise the fed funds rate," Dallas Fed President Lorie Logan noted. Still,  other Fed policymakers adopted a more cautious tone and said that rates may need to rise further, citing strong economic activity. The probability of the Fed leaving the policy rate unchanged this year climbed above 70% from about 60% in the previous week.

On Thursday, the US Bureau of Labor Statistics reported that inflation in the US, as measured by the change in the Consumer Price Index (CPI), held steady at 3.7% on a yearly basis in September. Annual Core CPI inflation edged lower to 4.1% from 4.3% in the same period as forecast. Despite the softening core inflation, the so-called "super core" inflation, which measures the change in the prices of core services excluding the home rent component, registered a strong monthly increase of 0.6%. The 10-year US yield rose more than 3% as the odds of a December rate hike climbed back toward 40% after the CPI figures. Consequently, XAU/USD lost its traction and erased a portion of its weekly gains.

The positive impact of the inflation on the US bond yields remained short-lived. The 10-year yield turned south early Friday, helping XAU/USD shake off the bearish pressure and advance beyond $1,880 once again. Meanwhile, data from China showed that the country’s trade surplus widened to $77.71 billion in September, compared to the market expectation of $70 billion and the $68.36 billion surplus seen in August. The data provided an additional boost to the pair. Ahead of the weekend, investors fled to safety as Israel called for more than 1 million civilians in Gaza City to evacuate and relocate south within 24 hours. Gold surged higher and broke above $1,900. 

Next week

September Retail Sales data will be featured in the US economic docket on Tuesday. Investors expect an increase of 0.3% on month following the 0.6% growth recorded in August. Since this data is not adjusted for price changes, it is likely to be ignored by market participants.

In the Asian session on Wednesday, third-quarter Gross Domestic Product data from China will be watched closely by investors. The Chinese economy is forecast to grow at an annual rate of 4.4% after expanding 6.3% in the second quarter. A disappointing GDP reading could revive concerns over a weak demand outlook for Gold and cause XAU/USD to turn south.

The Fed’s blackout period ahead of the November policy meeting will start on Saturday, October 21. Hence, Fed policymakers will likely use next week to steer the markets in a certain direction. In case officials continue to cite rising yields as a reason to hold the policy rate steady, US T-bond yields could continue to stretch lower and allow XAU/USD to extend its uptrend. A yield of 4.5% aligns as a key support level for the 10-year US Treasury. If that level turns into a resistance, another leg lower in the 10-year yield could be seen. If officials reiterate the data-dependent approach to policy and refrain from rejecting further tightening until they see more evidence of softening inflation, the pair could have a difficult time gathering bullish momentum.

Markets will pay close attention to geopolitics as well. The impressive rally seen in XAU/USD on Friday suggests that Gold is likely to continue to benefit from a further escalation in tensions in the Middle East.

Gold technical outlook

The Relative Strength Index (RSI) indicator on the daily chart climbed above 50 and XAU/USD surpassed the 20-day and the 50-day Simple Moving Averages (SMA) on Friday, highlighting buyers’ dominance. On the upside, $1,925-$1,930 (100-day SMA, 200-day SMA) aligns as an important resistance. A daily close above this hurdle could bring in technical buyers and open the door for another leg higher toward $1,960 (Fibonacci 23.6% retracement of the latest uptrend) and $1,980 (static level). 

In case XAU/USD retreats below $1,900 (Fibonacci 38.2% retracement, 50-day SMA), sellers could take action. In this scenario, $1,875 (20-day SMA) could be seen as first support before $1,850 (Fibonacci 50% retracement).

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