The dollar remains a key function of how the gold price moves. Dollar moves have been uncertain now for a couple of weeks and the outlook for gold is equally lacking conviction. A dollar rebound today is weighing on gold this morning, but this is still within the consolidation range of recent weeks. We still hold a positive outlook on gold moving medium to longer term and see near term gold weakness as a chance to buy.
The dollar has been fluctuating in the wake of the FOMC meeting. Coming into the new week though, we are seeing significant risk aversion is weighing across major markets on fears of a second wave of COVID infections spreading through Europe. It was interesting that just prior to the European open the dollar was trading lower and gold slightly higher. This has been flipped on its head as European equities have sold hard today. The dollar (as a safe haven play) has rebounded and this has weighed on gold. The negative correlation between the two is still a key factor.
Despite this though, we can see that there is little overall direction on the dollar in the past couple of weeks. Subsequently gold has also been struggling for direction. Although USD has ticked higher today, we still see Dollar Index being limited under 93.50/94.00 resistance. This should help to support gold in the $1902/$1926 band of lows. Whilst this period of consolidation on the dollar plays out, we remain neutral on gold.
The main caveat we also need to keep an eye on is the futures positioning for the dollar. There has been a net dollar negative positioning for a while as sentiment has turned sour for the greenback in recent months. Is this set up for a short covering rally?
If a short covering dollar rally kicks in, it will be interesting to see how long its lasts for. It would likely be near term gold negative, but would it generate another chance to buy?
Looking longer term, we 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.
- $1937/$1940 – near term pivot band ($1932 was a spike low)
- $1920 – 9th September low
- $1902 – 26th August low
- $1960 – 18th September high
- $1974 – 2nd September high
- $1992 – 1st September high
Gold closing tentatively higher on Friday has settled immediate fears of a renewed downside momentum build up, but the largely neutral tone to the outlook persists now. Daily momentum indicators are sitting very much around neutral levels, with RSI and Stochastics flat but a shade above 50, whilst MACD lines are flat but a shade above neutral. We continue to take any support on gold above the 23.6% Fibonacci retracement (of $1451/$2072) at $1926 as being marginally positive for the gold outlook.
However the bulls need to pull above $1973 to really push towards the key near term resistance of $2015. The hourly chart shows support holding above $1937/$1940 pivot band which sustains the mild positive bias, however, indicators appear neutralised still and the bulls unable to push forward. A move above Friday’s high of $1960 would be an indication of something moving, but for now, it is very difficult to get excited about gold.
STRATEGY: Recent choppy trading and lack of trend means that gold is consolidating in a neutral outlook between $1940/$1974. Moving below $1937 leaves a negative bias whilst a close below $1926 begins to look more decisively corrective. This puts our positive outlook towards $1992/$2015 on hold for now, whilst this uncertainty plays out. Above $1974 turns the outlook more positive for a test of $1992/$2015.