Gold price forecast: Bullish fundamentals and technicals

Gold price has come under intense pressure as investors focus on the strong US dollar index. After rising to a record high of $2,080 in May, gold has now pulled back to the current $1,920. 

Gold demand still strong

Gold price has drifted downwards in the past few weeks as investors remain worried about the rising US dollar. As I wrote here, the dollar index has jumped to $105, the highest level in more than five months.

The DXY gain happened as the US emerged as one of the best places for investors to store their money. For one, the country is seeing the best yields in more than a decade. For example, the 10-year yield has moved to over 4%, which is higher than the inflation rate of 3.2%.

Still, gold has some tailwinds that could support the economy. The biggest risk is the soaring US debt, which is about to hit $33 trillion. Estimates are that the country’s debt will surge to an unprecedented $50 trillion by 2030 or 2031.

The rising US debt has coincided with a period when China is cutting down its US debt holdings. China has dumped over 37% of its US debt to just $835 billion and analysts expect the trend to continue.

China is worried that the US will sanction these holdings when it decides to invade Ukraine. It has also become concerned about the ability for the government to pay back these funds.

“No, thanks!” to US debt

China has dumped 37% or $480 billion of US treasuries from its forex.

Lowest level in 14 years.

Dedollarization happens in many ways, not just in trade.

(US treasury holdings by China 2009-2023) pic.twitter.com/vB1Wxjktjc

— S.L. Kanthan (@Kanthan2030) September 1, 2023

While China is using some of these funds to fnd its economy, it is also investing some of them in gold. The most recent data shows that China has bought gold for nine months straight. It has bought more than 130 tons this year and some analysts believe that the figure could be underestimated.

China is not the only country selling US government bonds and buying gold. Saudi Arabia has reduced the holdings of US debt and bought gold. It is estimated that these reserves are worth over $230 billion. Therefore, gold fundamentals are still strong since supply is not growing as fast. 

Gold price forecast

The daily chart shows that the XAU/USD pair has been in a downward trend in the past few months. In this period, gold has dropped below the 25-day and 50-day moving averages. A closer look shows that gold has formed a cup and handle pattern.

It has also formed a descending channel shown in green. This channel could be the handle section of the price.

Therefore, while the bearish trend could persist for a while, gold will likely bounce back in the coming months. If this happens, the initial resistance to watch will be at $2,000. A break above that level will see it rise and retest an all-time high of $2,080.