Trading outlook:
Gold continues to consolidate in a tight band waiting for the uncertainty of key macro factors to be resolved. We still see strong correlations with the dollar and yields as major markets align ahead of crucial decisions on US fiscal stimulus and the Presidential election result. However, for now, gold traders are kept on tenterhooks.
Fundamentals/Newsflow
Markets are very much in wait and see mode for now. Gold has two strong correlations, with the dollar (strongly negative) and Treasury yields (specifically the 10 year yield, which is increasingly positive). This is because the dollar is such a strong safe haven play right now, with gold aligned to more “risk-on” currency plays.
Newsflow is likely to break the consolidation. Of primary focus are the negotiations over US fiscal stimulus. Can agreement be struck? The two sides are apparently narrowing their differences, but Democrat House Speaker Pelosi has given a 48 hour deadline which expires today. Failure to agree would be risk negative, strengthen the dollar near term and therefore be gold negative.
However, markets have been strung along over fiscal stimulus for several weeks. Also the election is now so close (only two weeks away) that any jolt to risk appetite may only be temporary. Biden is way clear in the polls and unless there is a dramatic swing back to Trump in the final days, then he is likely to be President. This is what markets are already positioning for and it would mean that if there was a “blue wave” (Democrat victory in the Senate too) then the Democrats can quickly implement their $2.2 trillion fiscal stimulus.
So even if there is a failure to come to an agreement on stimulus today, it could still only mean a short jolt to risk appetite. Perhaps the consolidation may last all the way up until the Presidential election in two week’s time. The question is whether it would jolt gold from its consolidation.
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
- $1894 – intraday low, 20th October
- $1889 – 15th October low
- $1881 – 8th October low
Resistance
- $1918 – 19th October high
- $1925 – intraday high 13th October
- $1933 – 12th October high
Technical Analysis
The consolidation continues. As the two big trendlines continue to converge but right now, it would appear that the market is unwilling to take a view on gold. The support of the six month uptrend rises at $1888 today, whilst the two month downtrend falls at $1922. It is of little real surprise that the price seems to be gravitating once more around the $1900 area, with the pivot/resistance band between $1902/$1933 a barrier to renewed upside.
Within this, momentum indicators are extremely neutral and lack conviction. The daily RSI continues to hover a shade below 50, whilst MACD lines are flat just under the zero line (i.e. neutral). With a run of small bodied candles (lacking conviction) and the high/low range of the last three sessions all less than the Average True Range of $26, this is definitely a market in “wait and see” mode.
A close below $1882 would begin to generate downside momentum (confirmed below $1873 support). A close above $1933 would generate positive momentum. For now though, as with several major markets, it is a waiting game (likely to be for fiscal stimulus and or the US Presidential election).
STRATEGY: In a market lacking direction, gold is stuck between converging trendlines and we are neutral as a consolidation continues. We see this lack of conviction perhaps even until the US election has played out. A breach of $1873 support would open near term downside towards $1848 again, but we would favour buying into weakness for continued upside over the longer term. If the consolidation breaks above $1933 this would renew a bullish outlook for $1973/$1992.
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