After a short consolidation gold has picked up. However, is this a sustainable recovery? There is plenty of overhead supply to prevent the gold recovery from continuing. We still look to dollar moves to be the main driver of gold, so with broad market sentiment sitting at a crossroads, we see an uncertain near term outlook for gold.
This is an uncertain time for gold. As the dollar has tailed off slightly, gold has picked up as the negative correlation between the two remains strong. We have been positioned for a near term USD rally/gold correction before both these trends eventually turn around for medium term USD weakness/gold strength.
The moves in the past 24 hours (USD lower, gold higher) leaves an uncertain outlook. Dollar Index back around 94.00 is a key crossroads.
There is support 93.50/94.00 and whilst USD holds on to this support, we see the recovery outlook for USD as being intact. Therefore, with the negative correlation with gold, it suggests that this bounce on gold may only be short lived. There may be further weakness on gold in the coming days.
The near term outlook for both could be determined by the development of the US fiscal support package. If this is passed by Congress, then this would significantly improve risk appetite and hit the dollar. By extension it would also support gold which has seen its positive correlation with US equities back on track (after a wobble yesterday morning).
We still would see near term gold weakness as an opportunity. Looking longer term, we believe the outlook for gold will be driven by a “lower for longer” dovish Federal Reserve monetary policy outlook. The September FOMC decision shows willingness to accept higher inflation and not hike rates until 2023. This will help to underpin gold in the months and likely quarters to come. Continued looser for longer global monetary policy will keep real yields subdued/negative and should mean that gold remains attractive. Subsequently, this is still a good environment to be buying gold into supported weakness.
- $1866 – intraday high, 25th September
- $1848 – 24th/28th September lows
- $1835 – 38.2% Fibonacci retracement of $1451/$2072
- $1887 – intraday high 29th September
- $1894 – near term pivot
- $1902 – 26th August old key low
Gold has been in decisive correction mode recently, but this move has slowed in recent days. Now, having posted a “bullish engulfing” one day candlestick, the buyers are looking to bounce back. The question is whether this is a sustainable recovery. This leaves the outlook at an intriguing stage. Key supports were broken during the correction, to leave old bulls sitting in stale positions. How they respond to a rebound could be key, as a near term rally could simply be seen as a chance to close these old long positions. The daily chart shows resistance above $1902 from the old August into September range, whilst nearer term the hourly chart shows resistance around $1882/$1894.
Gold needs to post a series of positive candles to improve confidence once more. Another positive candle today would help, but this resistance band needs to be broken, this means a close above $1902. The hourly chart shows holding above $1866/$1878 is needed to sustain the near term rally. A renewed bull failure today would put support at $1848 back under pressure along with the 6 month uptrend.
STRATEGY: The selling pressure may have eased, but the outlook for a sustainable recovery remains uncertain. Selling into strength is our preferred near term outlook as we see further scope for a move towards $1818/$1835. However, dollar moves are key and once the near term dollar rally has played out we would be looking for supported weakness on gold to be a good chance to buy for the next medium term bull run. A close back above $1926 is needed to sustainably improve the outlook now.