Gold testing critical resistance ahead of $1,800s, dollar bears in assistance

XAU/USD is currently trading at $1,785.16, having travelled between a low of $1,769.64 and a high of $1,786.83.

Gold is elevated by some 0.6% on the day so far, performing well despite a risk-on environment while the greenback flakes away below a critical hourly support level.  

Despite the concerns pertaining to COVID-19, the week started off on the front foot in Asian financial markets, with stock indices rallying. 

European and US equities have also rallied with stocks on Wall Street accelerating gains with NASDAQ rallying 2% to a new all-time high. 

Everything, fundamentally, is starting to really add up for gold.

We have geopolitical tensions rising along with economic uncertainty, boosting safe-haven demand. 

“Gold is the midst of a regime shift, transitioning from trading as a safe-haven asset to an inflation-hedge product,” analysts at TD Securities have argued. 

Long-term inflation expectations are rising in sync with risk-on behaviour, while rates-vol remains deeply constrained amid uber-supportive policy, fueling a process that weighs on real yields. With 10y breakevens continuing to print new post-COVID highs, the normalization in inflation expectations may remain a powerful driver lifting gold prices deeper into $1,800/oz territory. 

US cases have been continuing to rise

• US COVID-19 storm clouds, transmission rate on the rise, concerns over airborne spread

Meanwhile, the latest US COVID-19 headlines do not make for nice reading, especially for the rise and spread of cases in some of the worst-hit the US states. 

US cases have been continuing to rise over the weekend, with the total number of cases nearing 2.9 million and deaths closing in on 130,000. 

The situation in Houston is being compared to that seen in New York in early April and Florida seeing around 10,000 cases per day. 

The latest updates come from the transmission rate in the US state of New Jersey rising to the highest level in 10 weeks. 

“I see storm clouds on the horizon,” Gov. Andrew Cuomo said last Wednesday as he announced indoor dining New York City was postponed indefinitely. 

Today, he warned that “this is a warning sign”.  

DXY treading on thin ice, gold at critical resistance 

As for the US dollar, it is losing its safe-haven allure, perhaps as investors continue to expect green shoots on the global economy to continue to grow as nations manage the spread of the virus while opening their economies and keep business going where they can. 

The DXY has a negative correlation to gold price trajectory and gold bears will be alarmed by the progress the dollar bears are making below a critical hourly trend line support in the 97 zone. 

A break of 96.70s opens the flood gates to 95.80 which could be just the nudge that gold needs to break the $1,790s on a spot basis. 

XAU/USD levels