Near term uncertainty has turned into consolidation on gold. The market has turned cautious as a crucial speech by the Fed chair Powell could generate some near term volatility on Thursday. We continue to view near term weakness as a chance for medium term buying opportunities. We still watch moves on the dollar and bond yields closely as their correlations with gold are still a key factor in driving the price of the precious metal.
Consolidation has set in for gold and the market seems to be looking ahead to the speech of Fed chair Jerome Powell on Thursday. Powell is anticipated to set out a path for Federal Reserve monetary policy moving forward and the reaction of Treasuries and the US dollar could have significant near term implications for gold.
It is interesting to see that gold seems to be tracking moves on the dollar more than yields for now. Previously during July and early August, the strong negative correlation of both was holding with gold. The correlation is still decisively negative, but this morning although the 10 year yield is higher (and yield curve steepening) gold is not reacting. This is a hint of a negative bias for gold, but the price has not yet reacted today.
Yields moving higher yesterday helped to drag gold back into the close. However it is interesting to see that although yields are higher again today, the impact is not (yet) being seen on gold. Yields higher is risk positive (and therefore tends to be gold negative). However, it could be to do with the consolidation on the dollar too. The dollar is not performing well in today’s risk positive market (a strong move through equities higher is also weighing on the dollar). Therefore, the dollar lower is helping to hold up gold today and continuing the consolidation.
So despite this consolidation, if anything there is a mild near term corrective bias on gold (from the legacy of last week’s decline and yesterday’s bull failure). Perhaps the lack of downside move today could be seen as encouraging for the bulls. However, what is more likely is that traders are unwilling to take a view with the real volatility set to come on Thursday this week (Powell’s speech is at 1410BST).
Looking further out, we still believe that fundamentals on gold will underpin for a stronger gold price in the medium to long term. Loose global monetary policy for many months (and possibly years) to come, will keep real yields subdued/negative and should continue to mean gold is attractive. Subsequently, this is still a good environment to be buying gold into supported weakness.
- $1923 – 24th August low
- $1911 – 21st August low
- $1906 – 12th August low
- $1955 – old pivot
- $1961 – 24th August spike high
- $1973 – intraday high, 19th August
As with several of the major markets we look at consistently, we are seeing conflicting signals on gold which is generating a consolidation for now. What looked to be conviction buying in the rebound from $1863 was scuppered by a big selling day on Wednesday last week. Since then the gold price has formed a series of small-bodied candles that seem to be gravitating around the 23.6% Fibonacci retracement of the big $1451/$2072 rally at $1926. The near term pullback downtrend line comes in around $1973 today. This would need to be breached for the bull to be looking at a renewed rally scenario.
Initial resistance is at $1961 from yesterday’s bull failure. There is still a sense that this is still a moderating pullback to the big 11 week uptrend (which supports at $1901 today). The daily momentum indicators have been unwinding but are also now stabilising in decent areas to suggest this has been a good phase to renew upside potential for the renewal of the medium to longer term trend higher. However, this could be a consolidation that continues for a few days yet though, with a crucial speech by Fed chair Jerome Powell on Thursday likely to drive the next key move. Support at $1906/$1911 will become ever more important as this week rolls on and the uptrend rises.
STRATEGY: Consolidation has set in and gold is looking less certain on a technical basis ove the near to medium term. For now, we still see supported weakness towards the medium term uptrend around $1900 as a chance to buy. Although we cannot rule out another near term decline potentially into the mid-$1800s, the longer term fundamentals point towards a higher gold price in due course. We still favour a move above $2015 which would open the upside with conviction once more to retest the highs.