Trading outlook:
Gold continues to trade with a risk positive bias, and so as sentiment improves picks up again, gold is pulling higher. However, the broad sense of consolidation is still playing out and decisive direction is yet to be found. We continue to look at US fiscal stimulus and the outlook for the dollar to be key for gold.
Fundamentals/Newsflow
We continue to wait for gold to make its decisive next move. However, there are slight hints that its main correlations (the dollar, and recently the resumption of Treasury yields) are moving in the right direction for the gold bulls. However, there is still plenty to resolve for US fiscal stimulus to be ratified, and so we would remain cautious for the sustained direction of gold.
After an uncertain end to last week for the dollar, there is a gradual weakening coming back in again this morning. This is helping to usher gold higher. Even though the strong negative correction is just easing slightly, we still see dollar moves as being key for moves on gold. A weaker dollar is gold positive. The US Dollar Index falling consistently under 93.50 and back towards 93.00 would certainly help the gold bulls.
We also see that the positive correlation (which is admittedly not a normal relationship) between gold and Treasury yields is strengthening (the most positive since January 2020). As yields move higher today, gold is also moving higher. This reflects the fact that gold is not seen as a safe haven play right now.
If we see the US 10 year Treasury yield above +0.80% this could help to drive gold back higher through $1933. This could easily be seen if US fiscal support gets agreed, or later down the line if there is a clean blue sweep in the US elections (a Biden victory and a Democrat controlled Senate).
This is looking good for our continued positive long term outlook for gold. However, we have to remain cautious ahead of any clarity over US fiscal support, and also the US Presidential election just over two weeks away.
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.
Support
- $1897 – 16th October low
- $1889 – 15th October low
- $1881 – 8th October low
Resistance
- $1914 – 16th October high
- $1925 – intraday high 13th October
- $1933 – 12th October high
Technical Analysis
We have seen so many major markets (forex and commodities) consolidating recently. This is the same with gold, but is there just a hint of positive bias beginning to show through? The two trendlines continue to converge (six month uptrend now at $1885, two month downtrend now at $1925), but with the market just putting together a run of higher lows and higher highs in the past month, there is a bias towards testing the downtrend now.
Early gains today are helping to forge this view and if the market closes around here tonight, it would be three positive closes in the past four sessions. Trading back above $1902 also adds to the mild sense of improvement. The key resistance remains $1933, but a close above the 23.6% Fibonacci retracement (of $1451/$2072) at $1926 comes with increasing positive intent now.
The hourly chart shows resistance initially at $1912/$1914 this morning and a move through here will give the bulls a little more confidence of a positive bias which is beginning to hint into the hourly momentum. Initial support at $1897 above Thursday’s low of $1889. A close below $1873 would be a breakdown.
STRATEGY: The outlook has been neutralised between converging trendlines and we turn neutral for as a consolidation continues. We see the market lacking conviction perhaps until the US election has played out. Despite this, we favour buying into weakness for continued upside over the longer term still. A breach of $1873 support would open near term downside towards $1848 again, but we would still see that as the basis of the next opportunity to buy. If the consolidation breaks higher above $1933 would renew a bullish outlook for $1973/$1992.
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