Gold prices have more room to increase in the short term

Gold prices continued to recover after Friday's sell-off when prices fluctuated around $2,900/ounce. Although many analysts believe that this precious metal is showing signs of overbought, one expert said that gold still has a lot of room for price increase in the short term.

In the latest gold report, Tim Hayes - Director of Global Investment Strategy at Ned Davis Research - said that the weakening of the USD and falling bond yields are factors that benefit gold in the short term.

The potential risks of rising bond yields and a stronger US dollar have all declined. Our short-term USD index is showing a negative signal, which creates a positive momentum for gold.

In addition, the reversal in real-yield momentum over the past 10 years and anti-inflationary bond yields have brought these indicators closer to the new bullish signal zone, Hayes wrote in the report.

Hayes' negative view of the US dollar comes as the US dollar index moves near its two-month low, at 106.74 points.

Looking beyond short-term fluctuations, Hayes believes that gold is still in the early stages of an uptrend, both in the short term and long term. He said that in December, investor sentiment was quite optimistic, but has now gradually stabilized. However, the level of optimism is still not high enough to show that the market is entering a "too hot" period - a sign that often appears when gold prices peak.

Hayes said golds rally remains steady and un inflated. Meanwhile, the US dollar has gained strongly against its long-term trend, reaching its highest level in the 20% group of previous periods. History shows that after reaching this level, the USD often tends to weaken in the next one to 10 years.

He also commented that investor sentiment is gradually improving, because gold is still a safe haven and an effective defense against economic and geopolitical instability.

Through monitoring, we see that the global economic uncertainty index has increased to a high level, only lower than the peak period of the pandemic in 2020. Over the past 10 years, this index has tended to increase along with gold prices, Hayes said.

He also warned that if a escalating trade war causes inflation to increase, gold could be pressured by rising bond yields and the central bank's ability to loosen monetary policy.

Conversely, if the US dollar continues to weaken, gold will benefit not only from the depreciation of the greenback but also from the growth of US real money supply as well as the increase in fiscal spending compared to budget revenue. These are all important factors in the US monetary policy index, fiscal and real exchange rate.