Trading outlook:
After failing in their move to breakout above the October high, the gold bulls have been dragged back to be nullified once more. As the market lacks conviction ahead of some crucial fundamental events in the coming days, the near term outlook seems to be a waiting game.
Fundamentals/Newsflow
Fiscal stimulus in the US is still being negotiated, but as yet no agreement. The US election may be moving in Joe Biden’s direction, but the immediate potential for over $2 trillion of fiscal support for Main Street Americans is clouded with uncertainty. Rising COVID-19 cases leaves traders concerned and their appetite for risk is faltering. Subsequently the US dollar has found support in recent sessions. This does not help gold.
Gold is not playing as a safe haven right now (it has not done for several weeks ). The dollar (and the yen) are playing out that role right now. What is interesting though, is that in recent sessions, as equities have fallen sharply, yields have fallen too and the dollar has risen (all pointing to a safe haven bias) there has also been little real move on gold. In recent weeks, gold would have been falling (positively correlated to bond yields). However, the yellow metal has barely budged and is losing its strong correlations with both the dollar (previously strongly negative) and Treasury yields (now losing its abnormally positive correlation).
Perhaps it should be of little surprise as there are some huge fundamental events on the horizon:
- US fiscal stimulus – will they, won’t they? Even if they agree, it is doubtful that it could be implemented soon
- ECB monetary policy – will they signal more PEPP ahead in December? More QE would be gold supportive.
- US Q3 GDP – expect a huge number (+32% annualised expected).
- US Presidential Election – next Tuesday, polls point to Biden being well ahead c. 51/43, but the Trump effect leaves uncertainty even with the polls as they are.
With all this uncertainty and major factors contradictory for gold, we see that the outlook for gold is subsequently stuck with few seemingly willing to take a view. Perhaps it will not be until next week when we begin to see gold taking decisive direction once more.
Looking longer term, we see gold strength/outperformance still as our preferred positioning. Gold will be supported by a “lower for longer” dovish Federal Reserve monetary policy outlook. The willingness to accept higher inflation and not notably tighten monetary policy 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
- $1890 – 26th October low
- $1882 – 14th October low
- $1873 – 7th October low
Resistance
- $1910 – intraday high, 27th October
- $1914 – 23rd October high
- $1931 – 21st October high
Technical Analysis
Gold continues to struggle for any sustained direction. It had looked mid-last week that the bulls were beginning to flex their muscles again. A breach of the two month downtrend was seen, but resistance at $1933 (the October high) proved too much. The market has since been dragged back to the six month uptrend support. The bulls will point to the uptrend still holding, but the apex of the two old trendlines has now been reached, without any real breakout. So both trends could easily now be broken simply by the market consolidating sideways (as it has done now for over three weeks).
Momentum indicators remain almost entirely neutral, whilst the shorter moving averages (21, 55, 89 day moving averages) which illustrate short to medium term trends, are all clustered and flat. We therefore find it difficult to hold any view of conviction for now. Support at $1873/$1882 or resistance at $1931/$1933 need to be broken on a closing basis for any real conviction. For now then, we wait.
STRATEGY: The gold bulls have disappointed again by a lack of conviction. Although we are still positive for longer term gains, the near to medium term outlook is beset by consolidation and we hold a neutral positioning for now. If the market can confirm a breakout above $1933 this would renew a bullish outlook for $1973/$1992. A close below $1890 would signal a growing negative bias, opening $1873 and possibly a retreat towards $1848.
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