Saxo's Daily Financial Markets Quick Take
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The gold ship has steadied following a four-day correction that was triggered by the yellow metals inability to break resistance at $1788 per ounce. That failure triggered long liquidation from funds who had just added the most length in COMEX gold futures since June 2019. That reduction is now showing signs of having run its course with buying emerging at the former resistance level, now support at $1735. In a recent gold update before the metal sector received a boost from a weaker dollar and lower US bond yields, we highlighted the importance of $1735 as the trigger for a potential change in the trading behavior from selling into strength to buying into weakness. It is this potential change in sentiment that is now being tested.
Overall, the dollar's inverse correlation to precious metals and commodities remains a key source of directional inspiration for traders and algorithmic trading strategies. Since the November 3 low at $1615, gold has bounced by around 7% while the broad Bloomberg Dollar index trades down by close to 5%. In addition the recovery in gold has been supported by a 30 basis point drop in US ten-year real yields and a key part of the US yield curve inverting the most since the early 1980’s, thereby signaling an increased risk of a recession hitting the US economy next year.
A recession hitting before inflation has been brought under control remains one of our main reasons for keeping a bullish outlook for gold into 2023, but with ETF investors still cutting exposure despite the recent recovery, the metal needs continued support from declines in yields and the US dollar or some other catalyst that sees a run to safety.