There has been a subtle shift in the outlook for gold in recent weeks as a USD rebound has kicked in. Gold is less positive now and consolidation is weighing on the bullish outlook. The next phase could be triggered by the ECB on Thursday which could have a profound impact on EUR/USD and subsequently drive the gold price near term.
The dollar moves still seem to be a factor in how gold performs. In recent sessions the correlation has again turned sharply negative between Dollar Index and gold.
This comes as the dollar has consolidated back to a key multi month downtrend. This move still looks to be a consolidation within the trend and another chance to sell. However, the consolidation has now broken the equivalent uptrend on gold. This has reduced our conviction on a bullish medium term outlook gold slightly.
What is also interesting is that since Fed chair Powell signalled a shift in FOMC policy on inflation (moving to an average inflation target) we have seen a far more positive correlation develop between gold and the 10 year Treasury yield. This is worth keeping an eye on now, especially when inflation indicators (such as CPI) are announced.
On the immediate horizon, the consolidation could now be set ahead of a crucial European Central Bank monetary policy decision (and press conference) on Thursday. How the ECB reacts to the strength of the euro and also a drop into negative inflation territory (on the headline basis) will be key. Any dovish shift could drag on EUR/USD and subsequently pull USD strength across the major forex pairs. This would likely then weigh on gold, at least on a near term basis.
Looking longer term, we believe the outlook for gold was strengthened in the wake of Fed chair Powell’s Jackson Hole speech. 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.
- $1916 – 4th September low
- $1911 – 27th August low
- $1902 – 26th August low
- $1941 – 4th and 5th September highs
- $1950 – 3rd September high
- $1955 – near term pivot
A near term negative drift on gold has turned into a sideways consolidation. However, the move is now breaking the support of a three month uptrend and the bullish medium term outlook is losing some of its conviction. It is notable, that the market continues to trade around the 23.6% Fibonacci retracement (of the big $1451/$2072 rally) at $1926 and continues to close above the level despite intraday breaches.
This truly looks to be a market at an inflection point. Daily momentum indicators have unwound to consolidate back around strong buying opportunity levels. However, what could tip the balance for the next move. Closing below $1926 would be a negative warning, whilst below $1902 would be a key break. Our preference has long been to buy into weakness and nothing has changed in that regard, even if our conviction has wobbled slightly with the trend break. Resistance between $1940/$1955 is preventing a bull move now.
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.