With the fundamental outlook for gold bolstered by the dovish speech from Fed chair Powell, the positive closes are beginning to resume for gold and the outlook is turning far more positive once more. The buyers seem to be in the driving seat again as the technicals improve again. We back the move for continued gains, and look to use any near term weakness as a chance to buy.
A sharply weakening dollar is a key driver of gold moving higher. We have seen a downside break of Dollar Index below the support at 92.00 which continues to run of lower highs and lower lows of this sell-off. The door for the Dollar Index to move back towards 90 is now open and this sets up for further upside on gold.
The latter half of August saw an unwind of the strong negative correlation between gold and the dollar. However, as the dollar has broken down it is interesting to see that gold is now finding traction after a period of uncertainty.
It is interesting that the reaction on gold and yields to the speech by Fed chair Powell has begun to develop a far less conclusive correlation. Although this is yet to play out decisively on the 21 day Correlation calculation, there is an uptick that is beginning to hint this taking hold. This can be explained by the fact that longer-dated yields have increased post-Jackson Hole as the perception is that the Fed is willing to allow inflation to run hotter in the future (the time scale behind when this would be relevant is unclear right now). Traditionally, gold has a strong negative correlation with the 10 year Treasury yield (currently a 12 month average of -0.5) but could this about to turn into a period of less strong correlation?
Gold is always seen as a hedge against inflation. Real yields (bond yields minus inflation) being negative is gold supportive, so with longer dated yields rising because of inflationary factors (rather than increased growth expectations), with interest rates anchored, this is positive for gold.
For now, we see the dollar very much as a driver behind moves on gold, and far less indication from Treasury yields.
The outlook for gold has been strengthened from Fed chair Powell’s Jackson Hole speech which we see will help to underpin gold in the medium to long term. Looser for longer 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.
- $1976 – near term resistance now support – 27th/31st August highs
- $1965 – 1st September low
- $1955 – near term base pattern neckline – 31st August low
- $2000 – psychological
- $2015 – 18th August reaction high
- $2050 – 10th August high
As the dust has begun to settle from Jerome Powell’s Jackson Hole speech, there is a drive to pull gold higher once more. Near term pressure on $1975 has broken to the upside this morning and gold is now trading at near two week highs. During the August consolidation, there were some important technically positive chart developments. Holding the long 12 week uptrend, closing consistently above the 23.6% Fibonacci retracement (of $1451/$2072) at $1926 were key bullish factors. Now breaking the corrective three week downtrend, swings the market bullish once more. We look to use near term weakness now as a chance to buy for pressure on $2015.
The reaction around $2015 resistance will be the next step for the bulls to consider, although a close above the psychological $2000 would add to the improving outlook once more. The hourly chart shows the importance of the near term breakout above $1955 which is now a small base pattern implying $2000/$2010 as a target area. The strength is added to by a pullback which found support almost to the buck at the $1955 breakout yesterday. Today we see an initial support area $1965/$1976 forming.
STRATEGY: With the dovish implications of Fed chair Powell’s speech continuing to hit the dollar, gold is pulling higher. We see the price breaking resistance and testing higher now. A breakout above $1955 implies $2000/$2010 and supported near term weakness is a chance to buy. Below $1955 would be a near term disappointment now, but holding above $1900/$1926 support would maintain the positive outlook.