As the dust continues to settle from last week’s volatility, stability is returning to the gold market. There is still a risk that the announcement of a huge fiscal support package would drive Treasury yields higher once more and pull gold lower. However, beyond that with the strong fundamentals still underpinning gold, we would view that this recent correction as a medium-term buying opportunity.
The big gold correction hit almost exactly -10% at the extreme, driven by a near term bounce in yields and the dollar. However, the moves for yields and the dollar are tailing off now and the corrective momentum on gold has also stabilised.
Even though the correlation is less strongly negative than it was a week ago, if yields start to pull higher once more, then there could be another leg lower on gold.
It is a similar story on the dollar. If Dollar Index can regain upside recovery momentum through 94.00 then we can expect gold to be pulled lower again.
For now, yields and the dollar are consolidating, but what could generate the next move this week?
- Firstly, the FOMC minutes on Wednesday. The market is looking for signs that the Fed is set to take another step forward in easing. Last week’s rebound on yields came amidst massive debt issuance (which increases the supply of bonds, pulling prices lower and by association, yields higher). A dovish set of Fed minutes could pull yields back lower again. This would also be risk positive, dollar negative, but also positive for gold.
- The US flash PMIs for August on Friday are forecast to show continued improvement from the July data. Recent US data has been surprising to the upside, so there will be a positive bias moving into the data. However, any negative surprise could see a lurch lower on yields, the dollar and drive gold higher.
- The big warning of renewed volatility on gold (and another leg lower) would likely come through an agreement on fiscal stimulus in Congress. This still seems to be some way off though (apparently both sides being as much as $1 trillion apart). However, if something can be agreed, then a substantial package of fiscal support would pull yields higher. Support for the US economy is risk positive (so gold negative), whilst pulling yields higher. This also comes from what would be the need for massive bond issuance (again more bonds is negative for bond prices and positive for yields).
Despite all this, if the gold bulls can ride out near term volatility, we would expect that gold will begin to move higher once more.
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.
- $1929 – intraday low 17th August
- $1921 – intraday low, 13th August
- $1906 – intraday low, 12th August
- $1966 – 13th August high
- $1980 – old late July consolidation range high (resistance band $1980/$1984)
- $2000 – psychological
Since the huge volatility of early last week, that drove a significant 10% correction, the market has begun to settle down again. The issue for traders is whether the big shakeout has run its course, or whether there is another lurch lower yet to be seen.
After Friday’s mild negative candle (an inside day session) just saw the impetus of a two session recovery being lost, there is a need for caution into the new week. We are minded that we believe there is an appetite to buy gold still but near term technicals are likely to be shaped by events (the US fiscal support package is our primary concern).
After the rally tailed off at $1963, the market has moderated the near term volatility and a consolidation between $1920/$1963 is developing. This seems to be a market now biding time for something to generate the next move. The FOMC minutes this week are a possible key driver, whilst newsflow on the fiscal support package will also be watched. Initial resistance at $1955, whilst an intraday low at $1929 is initially supportive.
STRATEGY: The market is looking more composed after the big shakeout. Whilst we cannot rule out another near term sell-off, we believe that the medium-term buying opportunity we have been waiting for is there. Holding above $1920 will help to build confidence again. If gold can ride out any near term volatility from the US fiscal support, we are confident of renewed medium-term upside once more.