Trading outlook:
Support for gold continues to hold, but for now there is little sign of recovery. We still expect to see the near term gold outlook driven by USD moves, whilst it is interesting to see a lack of recovery on gold this morning as risk appetite has picked up. With the dollar recovery trend still intact, we see scope for further corrective pressure on gold and any near term strength seems to be a chance to sell still.
Fundamentals/Newsflow
Risk appetite across major markets has shown sign of improvement today. This is weighing on the dollar but despite the strong negative correlation still between the dollar and gold (currently over -0.9), gold is not able to feel the benefit. The dollar move lower is by no means confirmed and it seems that gold bulls do not have the strength to pull the price higher yet.
Furthermore, the recent positive correlation between gold and US equity futures has been faltering in the past couple of sessions. Usually gold is considered to be a safe haven play but the strength of negative correlation between gold and the dollar has left gold more aligned with risk in recent weeks. This has left a positive correlation between gold and S&P futures. However, there are signs in the past two sessions that this positive correlation may be beginning to de-couple once more.
This recently positive correlation has always been likely to be temporary and may now begin to reverse. This does not bode well for gold, leaving it stuck between a rock and a hard place. Not managing to find a bid off improved risk, but also struggling amidst the dollar’s still intact recovery.
This adds up to near term struggles for gold continuing. As long as there is not a drastic renewed dollar weakness, the negative drift on gold could continue.
Despite the near term gold weakness, as we look longer term, we still believe the outlook for gold will be driven by a “lower for longer” dovish Federal Reserve monetary policy outlook. The September FOMC decision shows willingness to accept higher inflation and not hike rates until 2023. This will help to underpin gold in the months and likely quarters to come. Continued looser for longer global monetary policy 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
- $1852 – 25th September low
- $1847 – 24th September low
- $1835 – 38.2% Fibonacci retracement of $1451/$2072
Resistance
- $1877 – 24th September high
- $1882 – 21st September low
- $1894 – near term pivot
Technical Analysis
The corrective run on gold may have lost some of its momentum in recent sessions, but moving into the European session on Monday, as yet there is still little sign of recovery. The move lower continues to trade around what we see as a tentative uptrend of the past six months (which sits around $1858 today).However, this comes as gold closed below $1863 on Friday (the old August spike low) and continues to tick lower early today. Having moved below the 23.6% Fibonacci retracement (of $1451/$2072) at $1926, this implies a move towards the 38.2% Fib is likely (around $1835), whilst the next real support is not until $1818 (old July breakout).
With technical momentum indicators turning decisively corrective last week, we see rallies struggling now. Initial resistance is at $1878 under the key band of overhead supply above $1902. The interesting factor will still be how gold reacts to any move lower on the dollar and also a pick-up in risk appetite. Both should be gold positive, but a failure to take this on will continue the downside bias in the technicals now.
STRATEGY: The selling pressure may have eased, but the outlook for a near term recovery remains uncertain. Selling into strength is our preferred near term outlook as we see further scope for a move towards $1818/$1835. However, once a dollar rally has played out we are expecting to see supported weakness would be a good chance to buy gold for what we see as the next medium term bull run. A close back above $1926 is needed to sustainably improve the outlook now.
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