The near term dollar moves remain key for the outlook on gold. Now in front of Nonfarm Payrolls, a dollar rebound is stalling slightly and gold consolidating. We continue to expect further dollar selling pressure to persist and therefore gold to strengthen in due course. Subsequently, the weakness on gold is an opportunity. However, with key support being tested, this looks to be a crucial time for the bulls to step up again.
The outlook for gold is very much tied to that of the dollar. Although the hugely strong negative correlation has eased since late August, it is notable looking at price moves in the past week that the two assets are still negatively aligned.
Coming into Nonfarm Payrolls today, the recent rebound on the dollar has just begun to stall slightly (see technicals below). This is coinciding with a basis of support forming on gold, seemingly just at the right time (again see technicals below). Dollar Index fell over at 93.07 yesterday, under resistance at 93.50 and 94.00. There is still room to unwind towards the 93.50 area (with a near four month downtrend coming in at 93.70 today), but we still see rallies on the dollar struggling for traction and seen as another chance to sell. We see this as supportive for gold.
How the dollar reacts to Nonfarm Payrolls today will certainly drive near term volatility on gold, however, it could be a difficult report to read into.
- A weaker than expected payrolls should be dollar negative as it would drive the Fed to be increasingly dovish in the upcoming September FOMC meeting. There is a caveat though, as it may induce a strong incentive to agree on Congress to agree on a big package of fiscal support (seen as something that would be positive for Treasury yields and positive for the dollar).
- In-line/mixed payrolls would likely see the dollar rebound also struggling once more, as it would suggest that the labor market is still struggling to significantly recover, but also will mean less pressure on Congress for a fiscal response.
- Strong payrolls would be near term dollar strengthening, but again mean less pressure to agree a fiscal support package.
How the dollar and gold come out of this payrolls report today could be key to the near term outlook. We still see weakness as being a chance to buy, but could there be another leg lower to factor first?
Looking longer term, the outlook for gold was strengthened in the wake of Fed chair Powell’s Jackson Hole speech which we see 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.
- $1921 – 3rd September low
- $1911 – 27th August low
- $1902 – 26th August low
- $1945 – intraday high, 3rd September
- $1950 – 3rd September high
- $1955 – near term pivot
Coming into Nonfarm Payrolls today, the strong bullish medium term outlook sits at an inflection point. The dollar rally of the past few days has dragged gold back to test its 12 week uptrend. Yesterday’s slight intraday breach could not be held into the close yesterday, but an early consolidation today continues to sit around the trendline (which rises at $1931 today). We have talked previously of the continues support found into the close around the 23.6% Fibonacci retracement (of $1451/$2072) at $1926 and once more this held as support yesterday. Clearly though, this level remains under pressure and a decisive closing breach of $1926 would begin to signal a shift in sentiment. A close below $1902 (last week’s intraday low) would really confirm a corrective outlook taking hold once more.
For now, this slide back is part of a growing consolidation between the low of $1902 and recent resistances $1991/$2015. The RSI moderating between 49/60 suggests there remains a bullish bias to the consolidation. Holding the supports though would be key, as RSI into the mid-40s would be a key warning that the bulls are losing their control. The hourly chart shows resistance now between $1945/$1955 which needs to be overcome to generate positive traction once more.
STRATEGY: Gold has taken a near term hit as the dollar has staged a rebound in the past few sessions but into payrolls there are signs that selling pressure is beginning to ease. We still see this as near term and a chance to buy. On the basis of holding support around $1902/$1926, we look to buy for renewed upside in due course and a retest of $1991/$2015. Conviction is tested on a close below $1926 and lost below $1902. Under $1900 opens the $1853 low again.