Gold has been hit hard as sentiment has taken a dive, with flow into USD as a safe haven asset of choice. The technical outlook has been significantly impacted with the market now breaking below $1900. A close below old support at $1902 opens a test of $1863 near term. The way the bulls respond to this setback will determine our outlook for a potential buying opportunity, because we still see near term weakness on gold as a medium to longer term chance to buy.
We talked yesterday about a dollar short squeeze yesterday weighing on gold. This move accelerated hard during the day and the momentum of the move is still in the market today. The dollar rally is now at a key point. If this is just a near term move resistance such as 93.50/94.00 on the Dollar Index will hold (this equates to the support around 1.1700 on EUR/USD holding). However, in the past 24 hours there has been a key shift in broad market sentiment. Is the outlook for the COVID second wave just a near term blip?
Below we see USD rebounding and this hitting gold. The negative correlation remains strong.
There are some aspects that could help to settle market nerves. The perception last week was that the Fed could have gone further dovish. Fed chair Powell speaks in the next few days and how he comes across will be key. If he hints at further easing measures then we could see sentiment supported. Markets also seem to be worried over the lack of fiscal response in Congress. The signs are not great, but if there can be a move towards an agreement, then it would also support sentiment.
Our assessment is that these factors will not be forthcoming and the drive of USD strength could continue near term. A closing break above 94.00 on US Dollar Index (a breach of 1.1700 support on EUR/USD) would drive gold lower to the mid-$1800s. How much further the dollar rally then goes will determine levels of support for gold. The next resistance on Dollar Index is 95.70/96.00. If it is accompanied by sharp equities selling, then gold could come under considerable corrective pressure near term. Note the strong positive correlation forming between US equity futures and gold.
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.
- $1882 – 21st September low
- $1863 – 12th August low
- $1835 – 38.2% Fibonacci retracement
- $1906 – intraday pivot
- $1920 – intraday high 22nd September
- $1937/$1940 – September pivot
Gold consolidation turned into sharp correction yesterday as everything linked to the dollar took a hit. Keeping in mind the Average True Range of gold is currently $28, a level that has not even been reached in the past two weeks, this was a sudden but sharp decline on gold. Technically it is also a key shift in sentiment. The consolidation between $1902/$2015 has been broken by an intraday drop to $1882. This may not has been sustained into the close, but there is a decisive deterioration in momentum now and downside pressure is growing. We have talked previously about the continual closing levels above the 23.6% Fib (of $1451/$2072) at $1926. This was decisively broken yesterday. Initial selling pressure today is adding to the growing negative move.
A close below $1902 would be confirmation of a new corrective phase. Initially this would open $1863 as the next test, but given the lack of real support until $1817, along with the 38.2% Fib at $1835, a much deeper correction could be seen. Momentum indicators are confirming the deterioration, with RSI falling at its lowest since March, Stochastics falling with downside potential and a “bear kiss” on MACD. The near term technical outlook is turning negative for a move back into the mid-$1800s, how the medium to longer term bulls then respond will be key.
STRATEGY: A sharp deterioration in gold has changed the outlook. We now turn negative near term and a close below $1902 would open for a correction towards $1835/$1863. We still hold a positive long term outlook and this move lower will be seen as an opportunity. For now though the near term move is lower. A close back above $1926 is now needed to improve, and furthermore above $1940 resistance.