Gold Price Analysis: XAU/USD surges to multi-month highs above $1835 amid technical buying/short-squeeze

• Technical buying has seen XAU/USD break out to fresh multi-month highs above $1835 as the dollar and US yields ease.
• There was likely a run on stops of bears betting on Fed tightening related gold weakness in the low $1830s.

With the dollar taking a breather from its earlier weekly gains and US yields either flat or seeing some modest retracement of recent gains, spot gold (XAU/USD) prices have taken the opportunity to rally to fresh multi-month highs in the $1830s. Technical buying as XAU/USD broke to the north of a negative trendline that has been capping the price action since last Friday has been the main driver of the move. At current levels around $1836, spot gold trades with gains of about 1.3% on the day. Now that the $1830 resistance area has been cleared, gold bulls will likely target a return to Q4 2021 highs near $1880.

Some macro strategists will be surprised at the extent of gold’s gains on Wednesday, which takes the precious metal's weekly gains to more than 1.0%. That’s because, on the week, the US Dollar Index is up about 0.4% and 10-year TIPS (real) yields are up more about 6bps. The moves in FX and bond markets reflect a further pricing of hawkish Fed policy expectations for 2022 and beyond and would typically weigh on gold. A stronger dollar makes USD-denominated gold more expensive for holders of foreign currency, thus reducing its demand, while higher real yields increase the opportunity cost of holding non-yielding precious metals, also reducing demand.

The latest move higher might well represent a stop-run, with gold bears having placed stops just above resistance somewhere in the low-$1830s. These traders would have been caught off guard by the recent move, but that doesn’t mean the threat of higher real yields and a stronger dollar can’t still deliver spot gold prices some damage. If gold markets continue to move higher in a way that is out-of-sync with bond and FX markets, the precious metal is at risk of becoming relatively “expensive” and vulnerable to a retracement lower.