The outlook is on a knife edge as a rally towards old overhead supply between $1902/$1926 has begun to consolidate. Dollar moves remain crucial to the near term direction for gold. Uncertainty over the progress over US fiscal support is generating consolidation on gold. Bull failure around $1902 or breakout above $1926 would generate the next move.
Uncertainty over the outlook for gold continues. Within that, the uncertainty over the outlook for the dollar is a key driver. Uncertainty over the progress of a US fiscal support through Congress means that markets are swinging between risk-on and risk-off on almost a daily basis. Hope of progress in the talks have allowed a more positive bias towards risk appetite to form today, but will this last if the talks come to nought?
Risk-on means that gold has ticked higher today. Although gold would traditionally be seen as a safe haven, the dollar is very much performing that role right now. Gold seems to be trading far more aligned to US equities, and is seen (at least for now). However, that positive correlation is just showing signs of stalling in recent sessions.
As such with the dollar lower, gold is higher today. We see the US Dollar Index back into the key support band 93.50/94.00, whilst gold has rallied into $1902 resistance. How the dollar responds around 93.50 could be key as a breakdown would be driving gold higher.
And so we could be in the situation now where we await progress or failure of the US fiscal support package talks. The two sides are seemingly still around $600bn apart (Democrats proposing $2.2trillion, White House proposing $1.6trillion). Can this gap be bridged with such a divisive Presidential election in the coming weeks? We do not believe it can.
As such, we still expect another leg of risk-off and dollar strength/gold weakness in the coming weeks for a leg lower on gold towards the mid-$1800s again.
We still would see near term gold weakness as an opportunity. Looking longer term, we believe the outlook for gold will be driven by a “lower for longer” dovish Federal Reserve monetary policy outlook. The September FOMC decision shows willingness to accept higher inflation and not hike rates until 2023. This 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.
- $1881/$1882 – 29th September low and near term pivot
- $1876 – 29th September low
- $1866 – intraday high, 25th September
- $1902 – 30th September high and 26th August old key low
- $1906 – old 8th September low and pivot
- $1920 – old 9th September low and 22nd September high
The near term outlook remains on a knife edge. Yesterday’s negative candlestick leaving a high at $1902 could be cause for concern for the bulls with the key overhead supply above $1902 looming. However, there has again been a positive response early today and the market is ticking back towards this resistance again. Can the bulls begin to break through? This is a crucial moment for the outlook. Is this a near term bounce to be sold into, or is it the resumption of the gold bull run. How the bulls respond in the band between $1902 (the start of the intraday lows of August/September) and $1926 (the 23.6% Fibonacci retracement of $1451/$2072 which was for weeks key closing support) will be crucial.
Another bull failure today will add to the fear that gold is still corrective from the August all-time high. Our preference is that the resistance at $1902/$1926 is too much and another lower high forms before a retest of $1848 kicks in. The hourly chart shows gold picking up from $1880/$1883 near term support again this morning. Holding this will be key near term. Dollar moves remain key as the negative correlation with gold is still very strong. Also newsflow on the US fiscal support package needs to be watched.
STRATEGY: The selling pressure may have eased, but the outlook for a sustainable recovery remains uncertain. Selling into strength is still our preferred near term outlook as we see further scope to retest $1848 and possibly towards $1818/$1835. However, a close back above $1926 would begin to suggest a more positive outlook forming again. How the market resolves this near term uncertainty will be key as we still see a bullish medium to longer term outlook on gold and that near term weakness is a chance to buy.