Trading outlook:
The bulls are threatening as gold rallies into $1902/$1926 resistance band. This has been helped today by the news that President Trump has been tested positive for COVID-19, which has seen gold benefit from safe haven flows. As the dust settles on this news, how gold now responds in the resistance band will be an important indicator for the ongoing outlook. We still believe that dollar moves will be key in determining the direction of gold.
Fundamentals/Newsflow
With this morning’s news about President Trump catching COVID-19, gold has taken on a safe haven bias today. What will be interesting to see now is whether this continues. Gold has not been a safe haven option for a while. The intensity of the dollar as a safe haven has meant that gold has traded far more aligned with US equities recently (i.e. gold has been positively aligned with positive risk assets).
However, this morning, there has been a slight decoupling of this move. Gold has moved higher with a stronger dollar, whilst equities have slipped today. The key will be how far market run with this Trump news. If the dust settles quickly and it has little lasting impact on the Presidential election, then we would expect gold to resume its strong negative correlation with the dollar, which has been the dominant correlation for gold recently (far more so than with Treasury yields anyway).
We still see the dollar holding in the 93.50/94.00 support area on Dollar Index. As markets settle, this should mean that the run higher on gold will begin to dissipate. If the Dollar then begins to rebound (on political risk in front of a highly uncertain and contentious Presidential election) then gold could then be dragged back again. Whilst gold is moving higher for now, we still see the need to be cautious with chasing the move higher. It will be determined by how the dollar reacts in the coming days/weeks.
However the alternative view is that gold has now already found its corrective low. We have long thought that weakness on gold should be seen as a chance to buy for medium to longer term upside. Could it be that this point has already been reached? Even if the low is already in place at $1848, we still see the likelihood of volatility in front of the election that will give another chance to buy gold.
Near term weakness is a chance to buy gold. Looking longer term, we believe gold 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
- $1889 – 2nd October intraday low
- $1881/$1882 – 29th September low and near term pivot
- $1876 – 29th September low
Resistance
- $1920 – old 9th September low and 22nd September high
- $1926 – 23.6% Fibonacci retracement of $1451/$2072 big bull run
- $1937/$1940 – old early September floor now resistance
Technical Analysis
Gold seems to be taking back on board the safe haven flow today as markets react to the news of President Trump’s COVID infection. An early slide lower overnight has been bought into as gold has swung higher. This may though only be the start of the intraday volatility today as trader try to process so many potential scenarios (and conspiracy theories).
The technicals show that gold is looking to now trade back above $1900 again, which begins to generate a more sustainable positive bias. The market is now trading inside the important band between $1902/$1926. The old support at $1902 is the start of a whole range of August/September lows and should now become a basis of resistance. So if the market can close clear above $1926 (which is the 23.6% Fibonacci retracement of $1451/$2072) which was for so long considered to be a key closing support, then the outlook will really begin to show signs of sustainable improvement.
The rally throughout this week is beginning to look as though it could be one of substance. For today, there is so much to pull markets around, and the reaction in the US session will be key (not least because of Nonfarm Payrolls). The hourly chart shows support between $1880/$1889 building in importance near term.
STRATEGY: Gold is edging higher into the resistance band $1902/$1926. If this is sustained once Trump newsflow volatility has eased, then the bulls could be readying for a move higher. A close back above $1926 would begin to suggest a more positive outlook forming again. How the market resolves this near term uncertainty will be key as we still see a bullish medium to longer term outlook on gold and that near term weakness is a chance to buy.
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