A period of uncertain consolidation on gold is on the brink of giving way to renewed positive intent by the bulls. With weakness of the US dollar resuming, we are seeing gold breaking through technical resistance, which looks to be re-opening upside once more. The bulls just need a final confirmation move to really release themselves from uncertainty. Holding above $1902 will sustain this growing positive outlook.
The dollar down, gold up. This is a consistent playbook of recent months as the negative correlation between the two has become increasingly strong (currently around -0.92).
So with the Dollar Index breaking below its 93.5/94.0 support band, this has come as gold is looking to break above its $1902/$1926 resistance band.
The dollar is weakening due to the perception of US politics and risk appetite. Joe Biden has clear daylight in the opinion polls for the US Presidential Election (averaging now around 10% lead). Here is the BBC’s poll tracker:
This is helping to ease market concerns of a chaotic election result (i.e. one which Trump contests and then is decided weeks later in the Supreme Court). Biden and the Democrats favour more US fiscal support (c. $2.2 trillion) which would be positive for risk appetite. The dollar is still very much a safe haven play (much more so than gold right now) and so the dollar is under selling pressure. With the strong negative correlation with gold, it means that gold is moving higher.
So whilst the polls remain with this huge 10% gap, the dollar looks to be under pressure. There is clearly some room for tightening the closer we get to the election, and this could help support the dollar slightly, but with just three weeks to go, this seems to be a mammoth gap for Trump to overcome even to be close enough to argue over any fraudulent aspect of the result.
Looking longer term, we believe gold will be supported by a “lower for longer” dovish Federal Reserve monetary policy outlook. The willingness to accept higher inflation and not hike rates until 2023 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.
- $1920 – near term pivot
- $1902 – old key low
- $1881– 8th October low
- $1937/$1940 – Old September pivot
- $1960 – 18th September high
- $1973 – 16th September high
There has been a highly questionable outlook on gold in recent weeks. Converging trendlines and a consolidation around pivot resistance $1902/$1926. However, there seemed to be a decisive shift in outlook on Friday. A decisive bull candle formation pulled gold to a three week high to close above the 23.6% Fibonacci retracement (of $1451/$2072 at $1926) which had been a basis of a key medium term pivot. This coming with a bull cross on MACD (the first since mid-June) and Stochastics accelerating higher suggests there is something building now. If the RSI can move into the 60s, it would be confirmation that the bulls are back in control.
Having broken a two month downtrend, another positive candle today would add conviction to the growing positive position now. The bulls certainly need to now hold on to the price above $1902 and use $1902/$1926 as a new buy zone now. The next resistance is $1973.
STRATEGY: The gold bulls are moving back into the driving seat, but are not in full control yet. After the breakout on Friday, a confirmation bullish close is just needed to now confirm. This would open $1973/$1991 resistance as the next test. Using the old band between $1902/$1926 is increasingly important support for the renewed bull confidence.