Gold is bouncing off the main trend line, US inflation data is coming in

Gold found support on the main trend line and stopped the short-term downtrend.
Gold sold off in November on expectations that U.S. interest rates would remain high.
US CPI inflation data for October may influence expectations regarding interest rate cuts and the price of gold.

Gold (XAU/USD) traded just above $2,600 on Wednesday after the precious metal’s November selloff to seven-week lows found technical support on the main trend line. Gold is taking a breather ahead of the release of key U.S. inflation data that could impact the future trajectory of interest rates, the main driver of the non-interest-bearing yellow metal. When interest rates fall, it benefits gold because it makes it more attractive to investors compared to other assets.

While the US Federal Reserve (Fed) was on track to lower interest rates due to falling inflation and concerns about a weakening job market – which led to a record high in the price of gold – everything changed with the election of Donald Trump to the White House. According to experts, Trump’s radical protectionism and “free market” economic policies will likely lead to a renewed rise in inflation, keeping interest rates high – which will be bad for gold.

The release of U.S. Consumer Price Index (CPI) data for October on Wednesday will provide the latest picture of the inflation situation and could impact market expectations about whether the Fed will cut interest rates at its December monetary policy meeting. According to CME FedWatch, market probability is currently 62.1% for a 25 basis point (bps) cut (0.25%) and 37.9% for the Fed leaving interest rates unchanged at 4.50%-4.75%. The situation may change if CPI surprises economists’ expectations. Market watchers are paying particular attention to elevated services inflation, which remains significantly higher than goods inflation and is a major contributor to CPI inflation still above target.

Outflow of gold ETFs, a factor in the recent decline

The decline in gold prices in November was partly due to enormous outflows from US Exchange Traded Funds (ETFs). They enable investors to purchase gold shares without the investors having to actually own the gold. According to data from the World Gold Council (WGC), gold ETFs lost approximately $809 million (12 tonnes) net in early November, driven by outflows from North America and partially offset by inflows from Asia.

Gold demand is also expected to fall in China, the world’s biggest consumer of the yellow metal, as an economic slowdown is expected to accelerate as the United States imposes higher tariffs on Chinese imports.

Gold is also falling due to competition from alternative assets such as Bitcoin (BTC), which is trading at $80,000, near all-time highs, on expectations that the Trump administration will ease cryptocurrency regulations.

U.S. stocks are also rising as investors expect lower corporate taxes and looser regulations to boost corporate profits, which could also lure funds away from precious metals.

Gold is generally rising as investors seek safety amid rising geopolitical risks. One such risk factor is the Russia-Ukraine war, which Trump boasted he could end “in one day – 24 hours.” However, in reality this did not happen. Trump is said to have warned Russian President Vladimir Putin during the phone call not to “escalate in Ukraine.” However, it does not appear that Putin will heed his advice, given reports of a steady augment in casualties in Russia.

Another geopolitical balmy spot is the Middle East, where the possibility of peace now seems less likely given Trump’s appointment of former Arkansas Governor Mike Huckabee as ambassador to Israel. Huckabee is a known Zionist and supporter of Israeli Prime Minister Benjamin Netanyahu. He said he does not support a two-state solution to the Israeli-Palestinian problem and views the West Bank as belonging to Israel. His nomination will likely embolden Israel and lead to further bloodshed in the region. If tensions augment, it could result in an inflow of unthreatening assets into gold.

Technical Analysis: XAU/USD Stops at Major Trendline

According to technical analysis, the precious metal is currently in a short-term downtrend, and given the technical analysis rule that “the trend is your friend”, the odds favor a continuation of declines. However, gold is bouncing off support from the main trend line and starting its long-term uptrend at around $2,600.

XAU/USD daily chart

A decisive break below the major trendline would confirm an extension of the short-term downtrend, likely to the next target of $2,540, the 100-day SMA and August highs.

A definite breakout would be one accompanied by a longer than average red candle that broke well below the trend line and ended near its low, or three red candles that broke clearly below the trend line.

However, the precious metal remains in an uptrend over the medium to long term, which poses significant risks of trend reversal in line with broader bullish cycles.