Trading outlook:
The bulls have made a tentative move into the key resistance band $1902/$1926. A weakening US dollar will help to build this momentum, but for now, this remains a market at a crossroads. Technicals are teetering on the brink and it is likely that the next moves on US fiscal stimulus could prove to be the driving factor.
Fundamentals/Newsflow
With the Dollar Index falling below 93.50/94.00 support band, the gold bulls have been given a boost. This has helped swing gold into the resistance band $1902/$1926 as the negative correlation remains as strong as ever.
What was also interesting is that gold once more reacted positively to improving risk appetite. For a second session in a row, gold was trading lower on positive risk during European trading hours (i.e. trading as a safe haven), but once the US came in, gold rallied with strengthening risk appetite. It seems that this morning we see gold and US equities far more aligned again.
So the direction of the dollar and the outlook for risk looks to be key. For that, we look to how the talks over US fiscal support are progressing. The two sides (Democrats and the White House) continue to try to come to some sort of agreement, but this would still need to be voted through the Republican controlled Senate (by no means a certainty). There is hope and Trump is pushing for an agreement, at least according to his Tweets.
A fiscal support package would be USD negative (which is why USD is pulling higher) and given the very strong negative correlation with gold, it means that gold gets pulled higher and is now into this technical resistance $1902/$1926. However, there is still much to overcome for gold to be bullish once more (see technicals below).
For a few weeks, we have been saying that the risk was for another leg lower on gold before the medium term buying pressure resumes. Perhaps that leg lower on gold will not be seen before the bigger move higher kicks in again. However, with just four weeks until the US Presidential election, we are still likely to see volatility on the dollar and given political uncertainty is still likely to take hold, do not rule out another leg of dollar strength that would pull gold lower near term.
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
- $1902 – old key low
- $1886 – 5th October low
- $1881/$1882 – 29th September low and near term pivot
Resistance
- $1917/$1918 – 2nd and 5th October highs
- $1920 – old 9th September low and 22nd September high
- $1926 – 23.6% Fibonacci retracement of $1451/$2072 big bull run
Technical Analysis
The bulls reacted positively to initial weakness yesterday, leaving another positive close and a move into the $1900s. However, this is still a market and a recovery that needs more to suggest it is sustainable. Gold is still yet to clear the band of resistance between $1902 (the old August low) and $1926 (23.6% Fibonacci retracement of $1451/$2072). With the early move today just consolidating, this is still a tentative looking rebound of the past week.
Momentum indicators have that look too, in that they are still at a crossroads. The RSI is hovering around 50, whilst Stochastics are just beginning to tail off slightly. MACD lines are threatening a bull cross, but we have seen this before, back in mid-September when it turned into a “bear kiss” instead.
It seems as though this is a crucial moment for gold. A seven week downtrend falls at $1944 (meaning there is room to run still in this rebound), whilst RSI throughout that downtrend failed around the mid-50s. This is still a highly uncertain recovery which could go either way right now. A close above $1926 helps to improve the outlook. Initial support now yesterday’s low at $1886.
STRATEGY: Gold is has tentatively edged higher into the resistance band $1902/$1926. With medium term momentum indicators around key levels this is becoming a key crossroads for the medium term outlook. The buyers need a close decisively above $1926 to begin to suggest a more positive outlook forming again, but still need a break of the seven week downtrend for gold to become bullish once more. Support between $1881/$1886 is becoming increasingly important now.
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