Gold pauses after powerful four-day rally

Key Points

• Gold pauses after a powerful four-day rally, having gained around USD 350 before reaching a fresh three-month high near USD 4,700. 
• Investor demand has recently returned, with ETF holdings rising by around 60 tonnes in August while hedge funds have lifted their COMEX net long to an 11-month high. 
• The latest rebound has been supported by technical momentum buying underpinned by renewed fiscal and debt concerns, geopolitical uncertainty, central-bank demand and the potential for renewed dollar weakness. 
• Consolidation would be healthy after the recent surge, with USD 4,770 the next major resistance area, while the 200-day moving average near USD 4,519 provides initial support.
  
  

Investor demand has strengthened noticeably. So far this month, total gold ETF holdings have risen by around 60 tonnes, putting August on track for the strongest monthly inflow since last September, while hedge funds have boosted their net long position in COMEX gold futures to an 11-month high, and as per the chart below the highest since January if we broaden the focus to include the "Other Reportables" category. Both developments highlight how renewed momentum, a technical breakout and heightened political, fiscal and financial concerns can quickly translate into stronger demand for bullion.

The drivers that have brought traders and investors back to gold have not gone away and we believe they are likely to remain supportive in the coming months. These include concerns about US fiscal sustainability and elevated debt levels, the prospect of renewed dollar weakness, central-bank demand and continued geopolitical uncertainty. In the near term, however, attention may shift towards consolidation, with bond-yield developments and signals from the upcoming Jackson Hole symposium likely to provide direction.

The Jackson Hole symposium runs from 27 to 29 August, with Chair Kevin Warsh delivering his first keynote on Friday 28 August. The theme of the symposium is titled “Financial Innovation: Implications for Payments and Policy” – seen as likely to deliver thoughts on the potential use of stablecoins for financial system plumbing, but the market is more curious about the Fed’s interest rate policy intentions.

After such a rapid advance, an orderly rally would arguably be healthier than another sharp acceleration. It allows investors and traders to build or reduce exposure without having to chase the market higher. Vertical moves tend to encourage hurried decision-making, while also increasing the risk of positioning becoming stretched and triggering a sharper correction when momentum eventually fades.

From a technical perspective, resistance is seen around USD 4,770, an area that combines the 50% retracement of the January-to-June correction with the May local highs. Initial support is at the 200-day moving average, currently around USD 4,519, followed by USD 4,410.

What could challenge the bullish narrative?

The renewed strength in gold does not come without risks. A sustained rebound in the dollar may remove an important source of support. Likewise, a more hawkish-than-expected message from Jackson Hole, reduced expectations for future Fed easing, or signs that US fiscal concerns are beginning to ease could trigger profit-taking after the recent sharp rally. Improving geopolitical conditions could also reduce haven demand, while increasingly stretched speculative positioning raises the risk that even a relatively modest change in the macro backdrop could produce a deeper correction. Technically, a failure to hold the breakout, particularly a move back below the 200-day moving average near USD 4,519, may weaken the current bullish momentum.