Gold stabilising ahead of support Gold stabilising ahead of support Gold stabilising ahead of support

Gold stabilising ahead of support

Ole Hansen

Head of Commodity Strategy

Summary:  The gold ship has steadied following a four-day correction that was triggered by long liquidation from funds in the futures market after it failed to break key resistance. With ETF investors still missing on the buy side, the dollar's inverse correlation remains a key source of directional inspiration as the metal now search for suppport in the $1735 area.


Saxo's Daily Financial Markets Quick Take
Podcast: Crypto and Tesla bubbleverse under siege


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.

Hedge funds were aggressive buyers of COMEX gold futures during a two-week period up until last Tuesday, November 15. During this time they bought 80,000 contracts or 8 million ounces, the strongest two-week buying pace since June 2019. As a result the net positions flipped from a short to 41k contract net long, a three-month high. However, the failure to break above key resistance in the $1800 area has left the metal exposed to a setback, hence the renewed focus on resistance-turned-support at $1735. 

One of the reasons why gold did not break higher last week was the continued absence of longer-term focused buyers through bullion-backed ETFs. Since the November 3 low and later rally, total holdings have seen a 210,000 ounce decline to the current 94.2 million ounces, thereby extending an almost non-stop pace of reductions since April. With ETF investors still sitting on the fence, another key source of support appeared during the third quarter from central banks. The Gold Demand Trends Q3 2022 update from the World Gold Council out earlier this month showed central bank demand reached a quarterly record of nearly 12.9 million ounces, thereby offsetting a 7.3 million ounce outflow from bullion-backed ETFs. 

At Saxo, we maintain a long-held view that the inflation outlook will likely surprise to the upside with a 4% to 5% range over the next decade not being that outrageous. Driven by a new geopolitical situation where the world is splitting into two parts with everything evolving around deglobalization driven by the need for self-reliance. Together with the energy transition, we are facing a decade that will be commodity and capital intensive, and where scarcity of raw materials and labor will keep inflation elevated for longer and higher than the 2.6% level currently being priced in through the swaps market. 

Such a scenario combined with the risk of an economic slowdown forcing a roll over in central bank rate hike expectations, sending real yields and the dollar lower, may in our opinion create powerful tailwinds for gold and silver during 2023. 

Having failed to break resistance at $1789, the 38.2% retracement of the 2022 selloff, the recent bounce can still only be described as a weak correction within a downtrend, and for that to change the break above is needed. In the short term the focus stays on $1735 support and the markets ability to attract fresh buying interest. Failure to do so would likely trigger more selling, initially to $1722 and potentially as deep as $1700. 

Source: Saxo

Disclaimer

The Saxo Bank Group entities each provide execution-only service and access to Analysis permitting a person to view and/or use content available on or via the website. This content is not intended to and does not change or expand on the execution-only service. Such access and use are at all times subject to (i) The Terms of Use; (ii) Full Disclaimer; (iii) The Risk Warning; (iv) the Rules of Engagement and (v) Notices applying to Saxo News & Research and/or its content in addition (where relevant) to the terms governing the use of hyperlinks on the website of a member of the Saxo Bank Group by which access to Saxo News & Research is gained. Such content is therefore provided as no more than information. In particular no advice is intended to be provided or to be relied on as provided nor endorsed by any Saxo Bank Group entity; nor is it to be construed as solicitation or an incentive provided to subscribe for or sell or purchase any financial instrument. All trading or investments you make must be pursuant to your own unprompted and informed self-directed decision. As such no Saxo Bank Group entity will have or be liable for any losses that you may sustain as a result of any investment decision made in reliance on information which is available on Saxo News & Research or as a result of the use of the Saxo News & Research. Orders given and trades effected are deemed intended to be given or effected for the account of the customer with the Saxo Bank Group entity operating in the jurisdiction in which the customer resides and/or with whom the customer opened and maintains his/her trading account. Saxo News & Research 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. To the extent that any content is construed as investment research, you must note and accept that the 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 under relevant laws.

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

Saxo Bank (Schweiz) AG
Beethovenstrasse 33
CH-8002
Zurich
Switzerland

Contact Saxo

Select region

Switzerland
Switzerland

All trading carries risk. Losses can exceed deposits on margin products. You should consider whether you understand how our products work and whether you can afford to take the high risk of losing your money. To help you understand the risks involved we have put together a general Risk Warning series of Key Information Documents (KIDs) highlighting the risks and rewards related to each product. The KIDs can be accessed within the trading platform. Please note that the full prospectus can be obtained free of charge from Saxo Bank (Switzerland) ltd. or the issuer.

This website can be accessed worldwide however the information on the website is related to Saxo Bank (Switzerland) Ltd. All clients will directly engage with Saxo Bank (Switzerland) Ltd. and all client agreements will be entered into with Saxo Bank (Switzerland) Ltd. and thus governed by Swiss Law.

The content of this website represents marketing material and has not been notified or submitted to any supervisory authority.

If you contact Saxo Bank (Switzerland) Ltd. or visit this website, you acknowledge and agree that any data that you transmit to Saxo Bank (Switzerland) Ltd., either through this website, by telephone or by any other means of communication (e.g. e-mail), may be collected or recorded and transferred to other Saxo Bank Group companies or third parties in Switzerland or abroad and may be stored or otherwise processed by them or Saxo Bank (Switzerland) Ltd. You release Saxo Bank (Switzerland) Ltd. from its obligations under Swiss banking and securities dealer secrecies and, to the extent permitted by law, data protection laws as well as other laws and obligations to protect privacy. Saxo Bank (Switzerland) Ltd. has implemented appropriate technical and organizational measures to protect data from unauthorized processing and disclosure and applies appropriate safeguards to guarantee adequate protection of such data.

Apple, iPad and iPhone are trademarks of Apple Inc., registered in the U.S. and other countries. App Store is a service mark of Apple Inc.