Gold is trading up more than $130, or 3.3%, at $4061.80. The price reached a high of $4070.53 after trading as low as $3919.93.
Lower Treasury yields and a weaker US dollar are helping fuel the gains. The US 10-year yield is down 6.6 basis points at 4.883%, near its lowest level since September 10.
Why do lower yields and a weaker USD support gold?
A weaker USD makes gold less expensive for overseas buyers. Gold is priced internationally in dollars. When the dollar falls against currencies like the euro or yen, buyers using those currencies can purchase the same ounce for less, assuming the dollar gold price is unchanged. That can encourage demand.
Lower yields reduce the opportunity cost of holding gold. Gold pays no interest. When Treasury yields fall, investors give up less interest income by owning gold instead of bonds, making the precious metal relatively more attractive.
Technical support provided the foundation
Recall that Monday’s low tested the rising 100-week moving average and a lower channel trendline near $3870. Buyers leaned against that support and pushed the price higher, establishing a base for today’s advance.
Today, buyers strengthened their control by pushing above the 100-hour moving average at $3960 and the 200-hour moving average at $3993.19. Those breaks shifted the shorter-term bias higher and helped accelerate the move toward $4070.53.
The support held. Resistance broke. Buyers gained more control.
The next upside test comes near $4088
The downward-sloping upper channel trendline near $4088 is the next upside barometer. Sellers may lean against that level, with risk defined on a break above. After today’s sharp rally, it also gives buyers a level to consider taking some profit.
However, a break above that trendline—and an ability to stay above—would give buyers another reason to push higher. The next targets would be the 38.2% retracement at $4186, followed by the falling 100-day moving average near $4205.
What would weaken the bullish bias?
If sellers defend the upper channel trendline, attention would turn back toward the natural support at $4000 and the 200-hour moving average near $3993.
That area is now a key downside barometer. Holding above would keep the shorter-term bias tilted in the buyers’ favor. Moving back below would weaken that bias and bring the 100-hour moving average near $3960 back into focus.
Trading lesson: Let the technicals confirm the story
Lower yields and a weaker dollar provide a supportive fundamental backdrop, but the technicals help traders define the trade.
The bounce from weekly support gave buyers a place to lean against. The breaks above the hourly moving averages confirmed improving momentum. Now, the upper channel trendline near $4088 provides the next test.
Buyers need to break and stay above that resistance to extend their control. If they cannot, traders have a defined level to measure a potential rotation back toward support.
This article was written by Greg Michalowski at investinglive.com.
