With momentum indicators at such extreme levels and volatility elevated, this make the near term outlook very challenging to navigate. With the FOMC meeting later today, the volatility is likely to remain high over the next 24/48 hours. Even if the initial retracement did not last long, we remain cautious that the bull run is susceptible to a near term pullback. However, we continue to view the fundamental outlook for gold as being strong on a medium to longer term basis. Any weakness should be short-lived and would provide the next opportunity to buy.
The bull run on gold has seen an incredible correlation with the sell-off on the dollar. There was a threat of near term retracements yesterday (USD rebounded, whilst the gold rally slipped), however, the bigger trends quickly re-established. For now, we see the dollar still under pressure and if this continues, it has the capacity to pull gold towards $2000.
Look at the strength of negative correlation that persists between the US dollar and gold.
It is interesting to see less of a strong correlation with Treasury yields (the US 10 year) as yields have started to stabilize recently. Yields are less of an impact on gold at the moment.
However, moving into the backend of this week, there are two key fundamental events to keep an eye on. The FOMC meeting and the potential for more fiscal support from Congress. Both these have the potential to induce near term retracements for moves on the dollar and on gold.
Reaction to the Fed meeting could be a key factor later today and into tomorrow. If the FOMC does not take a dovish shift to account for the perception of a US relative economic deterioration, then the market could see “disappointment” and it could induce the retracement. Will the Fed begin to seriously consider allowing inflation to exceed its 2% target? Could a form of yield curve control be introduced? Treasury yields falling into the 0.54%/0.60% band suggest that the market is positioning for this. If the Fed does not edge this way, then there could be a kick-back move, with yields higher and a USD rebound.
Furthermore, in the next few days, there is likely to be some sort of fiscal support package that Congress agrees upon. Certain aspects of the CARES Act expire this week (the $600 weekly pay guarantee ends) and there needs to be a replacement to avoid a cliff-edge scenario for the huge swathes of US laborforce impacted by lockdown. It is interesting to see USD slipping again this morning as suggestions are that the Republicans are even unsure of their own fiscal proposal. However, if agreed by Congress, a package of wide reaching fiscal support would be supportive for the dollar too.
If the dollar rebounds it could pull a rebound on Dollar Index into the overhead supply band 94.63/95.70. Given the strong negative correlation with gold, this would also induce a near term corrective move. We talked about he mid-$1800s yesterday, and this is still a realistic retracement area.
Once any near term corrective moves play out and settle down, we still see fundamentals underpin a stronger gold price and point to continued support for gold. Loose global monetary policy for many months (and possibly years) to come, will keep real yields subdued/negative and should continue to mean gold is attractive. Subsequently, this is still a good environment to be buying gold into weakness.
- $1930 – near term pivot
- $1907 – 28th July low
- $1898 – near term pivot support
- $1963 – intraday high 29th July
- $1980 – 28th July high, currently the all-time high
- $2000 – psychological
With volatility elevated on gold, we are seeing sharp intraday swings now. In yesterday’s session, it looked as though the profit-taking was kicking in with a -$73 decline from the $1980 session high. However, a swing back higher into the close leaves the rally at an intriguing point. The reaction into the close last night would suggest that the bulls are not quite ready to give in. Despite this, the daily chart shows another positive close last night and a run higher that continues.
However, momentum is incredibly stretched on a near term basis (RSI in the mid-80s is record levels). This leaves the gold bull run in its maturity and at risk of near term profit-taking. This is reflected in momentum signals on the hourly chart, which suggest a loss of impetus. All this coming ahead of the FOMC meeting tonight leaves traders in a sticky position.
Whilst gold continues to tick higher, it is hard to back against the run, but once there is a decisive move to take profits, there could also be a sizeable retracement (which we would still ultimately see as another chance to buy). The market held up at $1907 yesterday and support at $1898 was intact. We still see that $1930 could also be seen as a near term gauge of initial support. Initial resistance at $1963 protects the all-time high of $1980.
STRATEGY: We finally seem to be seeing a pullback on gold setting in as profit-taking signals are triggered. Below $1898 would open further pullback towards $1845/$1861. However we would view a near term correction into support as another chance to buy for further medium term upside in due course.