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Gold consolidation continues as traders consider what will drive the next move

Trading outlook:
The outlook for gold has become increasingly neutralised over recent weeks. A pick up for the dollar is still expected to be only near term before renewed selling pressure is likely in the coming weeks and months. Subsequently, with the ongoing negative correlation with gold, we expect gold will retain an upside bias and near term weakness will be a chance to buy. Will it be this week’s Fed meeting to drive the next move?

 

 

Fundamentals/Newsflow

Gold is ranging. This comes as its traditional correlation markets are also ranging.

The correlation with the US dollar seems to be the strongest right now, with the 21 day Correlation calculation at -0.62. It is interesting to ee that the dollar has been stuck in a range between 91.73/94.00 on US Dollar Index since early August. This comes as the rally on gold has moderated, with the market settling in a range between $1902/$2015 in the past five weeks.

It is clear that dollar moves are still very important for gold. We expect that the dollar rally is still likely to be short-lived and that selling pressure will resume in due course. The meeting for the Federal Reserve could be the next catalyst for a move on the dollar. The big question that traders will be asking the coming days is how much has now been priced into Fed policy in the wake of Jackson Hole?

Treasury yields are also key. The correlation with the US 10 year Treasury yield and the gold price may have moved to zero (ie. no correlation) recently. However, this has come as yields have lost their trend in recent weeks. It leaves both yields and gold effectively ranging for now.

Our expectation is that the ongoing dovish positioning actions of the Federal Reserve will keep a lid on Treasury yields which by extension will underpin gold. This week’s FOMC meeting is the next opportunity for volatility on yields to take off, and therefore, some moves on gold are likely to also result. Given the market has been signalled the dosh lower for longer Fed policy, we could see limited upside risk. We would though see any weakness on gold to be a chance to buy as we do not expect yields to drive sustainably higher moving forward.

Looking longer term, we believe the outlook for gold will be driven by Federal Reserve monetary policy outlook. Fed chair Powell’s Jackson Hole speech suggested a willingness to accept higher inflation and not hike rates 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.

 

Support
  • $1937/$1940 – near term breakout support
  • $1920 – 9th September low
  • $1906 – 8th September low
Resistance 
  • $1955 – old near term pivot again resistance on Friday
  • $1966 – 10th September high
  • $1974 – 2nd September high

 

Technical Analysis

The control that the gold bulls had during July and early August has been lost. An uptrend that supported the run higher during the summer months has now been broken as a phase of neutral trading has set in. What we now see is that gold has developed a range between $1902/$2015. Anything into the low $1900s is finding support, but as the market again fell over on Friday, the bulls cannot now sustain traction in a run higher. Momentum has been neutralised, with daily RSI, MACD and Stochastics all around their neutral points. The 23.6% Fibonacci retracement (of $1451/$2072) at $1926 is still a key element of support (on a closing basis especially) and is seen as a key gauge.

However, the bulls seem to be increasingly misfiring. It was interesting to see the old $1955 pivot coming back in as a basis of resistance again on Friday. This resistance will need to be decisively overcome for the bulls to believe that traction is beginning to be made again. Initial support is $1937/$1940 which is protecting the 23.6% Fib level again today.

STRATEGY: Gold has dipped into a phase of consolidation. For now, we still see this as part of near term weakness in a medium-term bullish outlook and a chance to buy. However, our conviction is being tested. 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. A decisive close below $1926  tests this view and lost below $1902. Under $1900 opens the $1853 low again.   

 

Richard Perry

Richard Perry

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