The rally has faltered and the market is stuck in a neutral outlook once more. Uncertainty over US fiscal stimulus, has driven a choppy phase for the dollar, which has impacted on gold. Whilst we continue to expect dollar underperformance to take hold in due course which should support gold, for now the outlook is stuck.
The near term outlook is struggling for direction. Constant swings of risk-off/risk-on (impacting the dollar primarily, which knocks on to the outlook for gold) are pulling gold around with a lack of conviction.
Uncertainty over the deliver of US fiscal stimulus seems to be a major factor right now. Suggestions from Treasury Secretary Mnuchin that agreement with the Democrats may be difficult in front of the election has hit risk appetite. Perversely, we find gold is not playing as a safe haven asset right now. The dollar is a big go-to for the market right now when risk appetite falters. This is coming at the expense of gold still, as the negative correlation between the dollar and gold remains extremely strong.
It is also shown by the fact that gold and Treasury yields have an abnormally positive correlation right now. With the 10 year yield falling again today, could this also be a near term drag on gold that is yet to be seen today?
And so we look to direction on the risk appetite and the dollar for how gold will move. Any move closer towards US fiscal support agreement is risk positive and (at the moment) gold positive. With the prospects for agreement still very much questionable, at least until after the US Presidential election, we are likely to see gold struggle for traction in the coming weeks. If the polls remain strongly in Biden’s favour (currently still around +10%) then gold may begin to catch a bid. For now though, consolidation.
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.
- $1891 – intraday low 15th October
- $1881 – 8th October low
- $1873 – 7th October low
- $1912 – 14th October high
- $1925 – intraday high 13th October
- $1933 – 12th October high
Several of the major markets appear to be stuck in a loop of uncertainty right now, and gold is no different. This gives rise the consistent breaking of trendlines. The search for ever shallower trendlines, means ever reduced conviction and effectively a market that ultimately is struggling for direction. We have spoken frequently of the importance of the old pivot band $1902/$1926 and it still seems as though this remains a key area which is effectively a neutral zone. As the market again struggles to break back above $1900 this morning, we see again a lack of direction.
With the bull failure earlier this week at $1933, we note a shallow two month downtrend (today at $1929) that helps to counter what is a fairly shallow six month uptrend (today at $1881). There is a lack of conviction on momentum, with RSI and MACD lines all but flat just under their neutral points, and so we wait for real direction to emerge once more.
The constant risk-on/risk-off of newsflow surrounding the US fiscal stimulus is playing into this lack of technical direction right now. Initial support at $1882 and $1873. Resistance initially at yesterday’s high of $1912 and then $1933.
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.