Why gold prices need to consolidate

Commodities 4 minutes to read

Ole Hansen

Head of Commodity Strategy

Summary:  The recent, steep rally in gold prices has brought the yellow metal right up to a region of hard resistance. Is the current combination of trade war and slowing macro enough to push gold higher?


Two weeks of steep gains in gold have left the yellow metal in need of consolidation, not least considering that the price has once again returned to the hitherto impenetrable area of resistance between $1,350 and $1380/oz. 
Source: Saxo Bank
Weaker stocks and lower bond yields over the past few months were not enough to shake gold out of its established range. What changed was the sudden acceleration in the market expectations for US rate cuts. This followed a batch of weak economic data from major economies and signs that the US-China trade war was moving towards a new Cold War in tech. During the past two weeks, the market has doubled its rate cut expectations for the next 12 months from 0.5% to 1%. 

This was the change that finally saw gold break higher and the question now is whether the renewed momentum is enough to carry gold higher. The is particularly relevant considering the Federal Open Market Committee led by chair Powell, at least for now, is not signaling a willingness to adopt the recent aggressive change in market expectations.

Yesterday in a speech at the Fed’s Chicago conference, Powell said the Fed was “closely monitoring” impact of trade developments and that it will “act as appropriate”.

On that basis and in order to maintain the current upside momentum in gold, market developments from here need to support the 1% gap between the current Fed Funds rate and the expected rate in 12 months’ time shown below. In the short term, this highlights the correction risk should economic data such as Friday’s US job report surprise to the strong side. 
We maintain the view that global growth momentum is slowing and likely to worsen further before renewed policy panic from global central banks will help to stabilise the outlook. On that basis, we believe that gold, following a period of consolidation, could eventually challenge resistance with a break signaling a potential $100 extension to the upside towards $1,480/oz, the 50% correction of the 2011-15 sell-off. 
Source: Saxo Bank
Silver’s recent rally following the breakout from its downward sloping wedge has so far met resistance at $15/oz. In a recent update, we highlighted the potential for silver to outperform gold due to the risk of short-covering from funds holding a near record net-short in COMEX silver. On that basis we maintain a focus on the XAUXAG ratio which, following three successive attempts to break 90 (ounces of silver to one ounce of gold), is now challenging support at 89.25.  
Source: Saxo Bank
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)

Saxo Capital Markets (Australia) Pty Ltd.
Level 25, 2 Park Street
NSW 2000
Sydney
Australia

Australia

The Saxo trading platform has received numerous awards and recognition. For details of these awards and information on awards visit www.home.saxo/en-au/about-us/awards

Saxo Capital Markets (Australia) Pty Ltd ABN 32 110 128 286 AFSL 280372 (‘Saxo’ or ‘Saxo Capital Markets’) is a wholly owned subsidiary of Saxo Bank A/S, headquartered in Denmark. Please refer to our General Business Terms & Combined Financial Services Guide & Product Disclosure Statement to consider whether acquiring or continuing to hold financial products is suitable for you, prior to opening an account and investing in a financial product.

Trading in financial instruments carries various risks, and is not suitable for all investors. Please seek expert advice, and always ensure that you fully understand these risks before trading. Trading in leveraged products such as CFDs and Margin FX products may result in your losses surpassing your initial deposits. Saxo Capital Markets does not provide ‘personal’ financial product advice, any information available on this website is ‘general’ in nature and for informational purposes only. Saxo Capital Markets does not take into account an individual’s needs, objectives or financial situation.

Apple, iPad and iPhone are trademarks of Apple Inc., registered in the US and other countries. AppStore is a service mark of Apple Inc.

The information or the products and services referred to on this website may be accessed worldwide, however is only intended for distribution to and use by recipients located in countries where such use does not constitute a violation of applicable legislation or regulations. Products and Services offered on this website is not intended for residents of the United States and Japan.
Please click here to view our full disclaimer.