It is still a phase of consolidation for gold as uncertainties for the outlook of US fiscal support leaves markets in a state of limbo. A lack of conviction in moves on the dollar and yields leaves gold at a key crossroads. With conflicting technical indicators on a near to medium term basis for gold we opt to keep our powder dry for now.
We are finding the drivers behind moves on gold are in a growing state of uncertainty. It should therefore come as little surprise that gold is struggling for direction right now.
There is seemingly no agreement in sight for US fiscal support. This is something which could now easily persist until after the Presidential election. Both sides seem to be allowing fiscal support (either deliberately or not) to become a political football. So lose to the election, this should come as little surprise, but does mean that agreement gets pushed back.
There is still a strong negative correlation with the dollar, but dollar moves have become less decisive and increasingly choppy in recent weeks. This comes at a time where gold has also lost decisive direction.
Even though a positive correlation between Treasury yields and gold has formed (suggesting that gold is not acting as a safe haven right now), even in the past couple of days this has become less certain.
And so we are left with a choppy and broadly directionless dollar leading a choppy and broadly directionless gold. It will come as little surprise that we see this as a difficult time to be taking a view on gold (even if we still see a positive long term outlook).
Looking longer term, we are still positive on gold and believe it 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.
- $1889 – 15th October low
- $1881 – 8th October low
- $1873 – 7th October low
- $1912 – 14th October high
- $1925 – intraday high 13th October
- $1933 – 12th October high
We still see the outlook for gold at an uncertain stage. The two trendlines continue to converge and gold is once more trading around an area we see as a neutral zone, between $1902/$1933. The two month downtrend falls at $1927 today, whilst the six month uptrend rises around $1883, so the price is almost bang in the middle.
Momentum indicators have flattened off in neutral areas and reflect a lack of conviction. So we await the market to make the next decisive move. That would come on a close above $1933 (which would be a four week high and confirmed downtrend line breach. Alternatively, a breach of the $1873 October low would be a negative move.
STRATEGY: The rally has faltered and the outlook has been neutralised between converging trendlines. We see the market lacking conviction perhaps until the US election has played out. However, a breach of $1873 support would be bearish, whilst a move above $1933 would be bullish. We favour buying into weakness over the longer term still, but for now we turn neutral for near to medium term positions.