Gold nervously awaits the November 2 FOMC meeting.At Saxo, we maintain our bullish medium but cautious short-term outlook for gold. In our latest update, we highlighted how the latest bounce has been supported by speculation that the FOMC may pause soon to assess the economic impact of the current rate hike cycle, which is currently pricing in a peak Fed funds rate just below 5% from the current 3.25%. In addition, we maintain the view that long term inflation will end up somewhere in the 4 to 5% area, well above the current market expectations for a sub 3% rate. If proven correct, it would trigger a major adjustment in breakeven and inflation swap prices – developments that may support gold through lower real yields.
Speculators and investors are likely to remain mostly side-lined until we get a clearer view on the thinking within the Federal Reserve, hence the importance of next week's FOMC meeting. According to the weekly Commitment of Traders reports, speculators in the futures market have been whipped around for the past few weeks, thereby reducing the willingness to aggressively enter the market until a clearer picture appears. The same goes for investors in bullion-backed ETFs, who have been net sellers on an almost continued basis since June. Overall total holdings have slumped to 2965 tons to a 30-month low, down 11% from the April peak.
After once again being rejected at the key $1615 support area, gold has a minimum need to break above $1735, thereby reversing a succession of lower highs, before an end to the month-long downtrend can be called. However, the path to that level remains littered with several smaller resistance levels, especially $1687 and $1700. For now and until such time momentum can be reestablished, watch yields, geopolitical developments and the dollar for directional inspiration. The latter traded higher following the ECB and BOJ meetings, thereby reducing support for commodities – especially gold where a high negative correlation has been established in recent weeks.
Earlier in the week, I joined hedge fund manager Erik Townsend on the widely listened to MacroVoices podcast for a rundown of the current developments across the commodity sector. Among the themes we discussed, were the reasons why we believe the sector will continue to do well over the coming years, despite darkening economic clouds gathering. Link to the replay here and on YouTube here.