The dollar rally has rocked the positioning for the gold bulls. A key technical breakdown sends gold corrective for a retreat towards at least $1818/$1835. Gold is not acting as a safe haven right now and given the strengthening negative correlation with the dollar, selling pressure seems set to continue whilst the dollar rally does.
An ongoing dollar rally will continue to drag gold lower. The negative correlation is now increasingly strong again and the longer the dollar falls, the longer gold will come under corrective pressure.
Now the resistance around 94.00 has been cleared, we see this rebound on the Dollar Index as potentially moving towards the 95/96 next area of resistance in due course. This suggests at least a further 1% to 2% downside on gold (suggesting the low $1800s could be seen).
We also note the increasingly positive correlation with gold and equities. Equities are selling off at the same time as gold. This suggests that gold is not a safe haven right now. The last time this situation occurred was in March when the first wave of COVID hit. Gold was sold off as part of mass portfolio liquidations. Is the same happening now? This positive correlation also helped a gold recovery in April, but for now it is a problem for the gold bulls.
Whilst the dollar rebound has weighed on gold, looking longer term, we still 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.
- $1848 – Intraday low 24th September
- $1835 – 38.2% Fibonacci retracement
- $1818 – 8th July high
- $1868 – intraday high 24th September
- $1882 – 21st September low
- $1894 – near term pivot
The dollar strengthening has really had a negative impact on gold. The price has driven decisively lower in the past few sessions, with key support levels breached. The move is continuing lower today. The rejection of the support around $1902 has been developing but as the US session took hold yesterday another surge of gold selling has pulled the market to what is now a two month low. There was some consideration given to the spike low of $1863 overnight, but the bears continue to drag the market lower today.
Having broken decisively clear below the 23.6% Fibonacci retracement (of $1451/$2072) the implication is a move to the 38.2% Fib level at $1835 now. However, if gold is anything like silver then the 50% Fib level may be also on the cards (at $1761). The first real price support is now not until $1789/$1818. We increasingly look to use near term strength as a chance to sell into this continued correction. The hourly chart shows a very near term downtrend around $1870 this morning, whilst the old $1863 support is resistance now.
STRATEGY: A sharp deterioration in gold continues. We now hold a negative near term outlook for pressure on $1818/$1835, but potentially further downside if this support is breached. Looking longer term this move will be seen as a chance to buy, but for now the near term move is lower. A close back above $1926 is needed to sustainably improve the outlook now.