The gold bulls are battling to maintain the improving outlook that has built up over the past couple of weeks. Renewing dollar strength in the past couple of sessions should still be an opportunity to buy gold, however, this is a testing time for the renewed positive outlook. The rally is yet to fully convince and a failure back into the $1800s would seriously question the intent of the bulls once more.
It seems as though this is a key moment for a new positive outlook for gold. Will weakness be bought into? It is a similar story for the dollar (but in mirror format as the negative correlation between the dollar and gold remains very strong). The dollar outlook has turned sour in the past couple of weeks as risk appetite has grown through a combination of the improving chances of a clean Biden victory in the election and US fiscal support. This has in turn helped to pull gold higher.
The last two sessions have seen a little pullback on this move, but as yet we do not see it as an outlook changer. The move has been helped by a low volume US public holiday and a jolt to risk appetite from pharma giant Johnson & Johnson pausing its COVID-19 vaccination trials. These should therefore just be temporary. The bigger picture outlook of fiscal support and a Biden victory in the election still seems to be on track. Subsequently, we see this as a mere pullback on gold which should produce another chance to buy.
We still see that gold is positively aligned with risk positive market moves. Bond yields move higher (bonds sold off) when risk appetite improves. Gold has become more positively aligned (or at least far less negatively correlated) with moves on US Treasury yields. This is still something that is abnormal, but for now is the case as the US dollar has become increasingly aligned as a safe haven.
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.
- $1909 – intraday low 13th October
- $1902 – old key low
- $1881 – 8th October low
- $1928 – intraday high 12th October
- $1933 – 12th October high
- $1937/$1940 – Old September pivot
It is clear that the bulls still have some work to do before they can be confident that they can run the price higher on gold. Although Friday’s decisive move higher took the market to a three week high, there is still a stuttering feel to this renewed rally. Yesterday’s negative close has been followed by early downside today. With the market closing on Friday above $1926 there was a feeling that weakness would become a chance to buy. We will now see how positive the market has become.
The hourly chart shows that a shallow uptrend channel can be derived, which reflects well the renewing positive run higher. However, holding above the old floor of $1902 would still be an important signal. Holding on to today’s early low of $1909 would be a positive response, especially as hourly indicators are back around important buying opportunity levels. The bulls will be looking to move back above a near term pivot at $1920 with resistance now at $1933. This is an important early test for the new positive outlook. Closing back under $1902 would be disappointing.
STRATEGY: The rally has not yet fully convinced and could still fail. However, for now, we see a drop back into $1902/$1926 as a chance to buy for further recovery towards $1973/$1991 resistance as the next test. A failure back into the $1800s would disappoint, whilst below $1873 would be a confirmed outlook change.