Trading outlook:
After a breach of the two month downtrend, gold look to be positioning for the next leg higher. Although resistance is yet to be decisively overcome, the bulls are poised. With renewed dollar weakness, the market seems to be pricing confidently for US fiscal stimulus and an uncontested Presidential election victory for Joe Biden. A continuation of this positioning would play a key role in driving gold for the next leg higher.
Fundamentals/Newsflow
Apparent progress is being made in the US fiscal stimulus talks. The two sides are seemingly close to agreement and this is being taken as a positive by the market. Although there is still no signatures on paper quite yet, there is a view that it will be a matter of “when” and no “if”. Adding in anywhere between $1.9 trillion and $2.2 trillion of support to the US economy is seen as bullish for risk appetite. With the dollar still a massive safe haven play, this has induced sharp selling pressure though the dollar. This has helped to support gold moving higher as the strong negative correlation with the dollar continues.
With the Dollar Index below 93.00 support this has re-opened the September low of 91.73. Considering how strongly negative the correlation with gold still is, if the market continues to sell the dollar, then this should help to pull gold through $1933 and towards its September highs of $1973/$1991.
It is interesting that yields spiked higher in recent days and whilst the positive correlation with gold has not managed to pull a breakout for the precious metal. Is this the start of the correlation reverting to its more normal negative relationship? Or is it just that gold is fashionably late to the party (which gives an opportunity)?
Looking longer term, we see gold strength 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
- $1910 – intraday low, 22nd October
- $1900 – gauge of sentiment under old key low of $1902
- $1894 – 20th October low
Resistance
- $1933 – 12th October high
- $1960 – 18th September high
- $1973 – 16th September high
Technical Analysis
We have been gradually seeing gold positioning more positively recently, but the market needed to push through several key resistance levels. With a solid bull candle that added +$18 into the close yesterday, the bulls made good progress but could not quite overcome the final couple of hurdles. The bulls pulled up short of the October high of $1933 whilst also the market closed back under the 23.6% Fibonacci retracement (of $1451/$2072 at $1926).
With momentum not leading the market higher (RSI still stuck in the low 50s, MACD lines still below zero) the bulls cannot breakout quite yet. How the market responds to an early pullback today will be key.
The near term $1910/$1914 breakout support holding is increasingly important to this and it seems to be doing so this morning. Hourly indicators have unwound into areas where the bulls should be looking to buy if they are really intent on a breakout too. After such a positive move yesterday, if the move just fizzles out, back under $1910, then it would be a disappointment. Back under $1900 would turn the near term outlook sour again. A decisive close above $1933 opens the way towards $1973/$1991.
STRATEGY: Gold finally seems to be poised for direction and it is with an upside bias. If the market can confirm a breakout above $1933 this would renew a bullish outlook for $1973/$1992. Support between $1900/$1910 needs to hold for this, whilst a close below $1894 would signal a loss of bull control.
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