Gold revival still depends on the dollar

Ole Hansen

Head of Commodity Strategy

Gold is trading back above $1,200/oz as it continues to recover from its mid-August nadir. A continued recovery could eventually trigger an accelerated rally due to short-covering from hedge funds currently holding a record short. For now, the key source of inspiration for gold traders remains USD, and this is true for both bulls and bears. 

The strong dollar surge following the collapse of the Turkish lira was halted in mid-August when President Trump criticised the Federal Reserve while saying that Jerome Powell had not been the cheap money chairman he had hoped for, and as a result the dollar was too strong. 

(Some other reasons for the latest dollar weakness and renewed appetite for risk can be found here in John Hardy’s latest forex update.
 
Gold is currently challenging the next area of resistance at $1,217/oz with a break above opening up for a move to $1,235/oz. Continued dollar weakness is needed to trigger a short-covering rally from funds holding a record short.

Enlarge
Source: Saxo Bank
Since then the greenback has continued to lose ground despite firm signals, as per the recent Federal Open market Committee minutes and last Friday's Jackson Hole speech by Powell suggesting the Fed is readying more rate hikes. One of the best performing major currencies has been the euro (+3.5% from its mid-August low) which despite worries about Italy has been supported by macroeconomic data that continue to beat estimates. 

The Citi Economic surprise index, which measures economic data surprises relative to market expectations, shows the current divergence between the Eurozone and the US where data have warned about a dollar turnaround for some time now, with data weakening relative to expectations.
Enlarge
The Chinese yuan maintains a very high historical correlation to gold and the two have continued to recover after the People's Bank of China sent a signal (through the use of various measures) in mid-August that a USDCNY rate above 7 was unlikely to be tolerated. Since then, the yuan has advanced by 1.9% while gold has added 3.4%.
Enlarge
The market will now increasingly be looking for signs of if and when hedge funds begin to abandon their record net-short position in COMEX gold futures. During a six-week period up until August 21, they accumulated a record short of 79,000 lots, some 3.3 times bigger than the previous record from December 2015. 
Enlarge
A recovery in gold may attract an even bigger interest in silver given its relative cheapness. The XAUXAG ratio currently trades at 81 (ounces of silver to buy one ounce of gold); silver has only traded above this level on a few occasions over the past 10 years.
Enlarge

You can access both of our platforms from a single Saxo account.

Disclaimer

Saxo Capital Markets (Australia) Pty Ltd prepares and distributes information/research produced within the Saxo Bank Group for informational purposes only. In addition to the disclaimer below, if any general advice is provided, such advice does not take into account your individual objectives, financial situation or needs. You should consider the appropriateness of trading any financial instrument as trading can result in losses that exceed your initial investment. Please refer to our Analysis Disclaimer, and our Combined Financial Services Guide and Product Disclosure Statement. All legal documentation and disclaimers can be found at https://www.home.saxo/en-au/legal/.

The Saxo Bank Group entities each provide execution-only service. Access and use of Saxo News & Research and any Saxo Bank Group website are subject to (i) the Terms of Use; (ii) the full Disclaimer; and (iii) the Risk Warning in addition (where relevant) to the terms governing the use of the website of a member of the Saxo Bank Group.

Saxo News & Research is provided for informational purposes, does not contain (and should not be construed as containing) financial, investment, tax or trading advice or advice of any sort offered, recommended or endorsed by Saxo Bank Group and should not be construed as a record of our trading prices, or as an offer, incentive or solicitation for the subscription, sale or purchase in any financial instrument. No representation or warranty is given as to the accuracy or completeness of this information. All trading or investments you make must be pursuant to your own unprompted and informed self-directed decision. No Saxo Bank Group entity shall be liable for any losses that you may sustain as a result of any investment decision made in reliance on information on Saxo News & Research.

To the extent that any content is construed as investment research, such content was not intended to and has not been prepared in accordance with legal requirements designed to promote the independence of investment research and as such, would be considered as a marketing communication.

Please read our disclaimers:
- Full Disclaimer (https://www.home.saxo/en-au/legal/disclaimer/saxo-disclaimer)
- Analysis Disclaimer (https://www.home.saxo/en-au/legal/analysis-disclaimer/saxo-analysis-disclaimer)
- Notification on Non-Independent Investment Research (https://www.home.saxo/legal/niird/notification)