Gold suffered its biggest one-day setback since November 11, 2016 following the election of President Trump. The weakness occurred after gold had made three failed attempts to break above $1550/oz. The profit-taking that followed turned into a rout as US stocks and bond yields both broke higher. Previous bull markets in gold, most noticeable the one from 2000 to 2010, were littered with aggressive corrections which, despite the strong gains during that decade, made it a very difficult market to trade for short-term tactical traders.
Despite being a painful experience for recent buyers, we view the upside potential as being enhanced by such a correction. The reasons why gold and other metals have rallied hard since early June have not gone away. Bonds worth trillion of dollars trade with a negative yield, the global economy is still slowing and the European Central Bank on September 12 as well the US Federal Reserve on September 18 look set to provide additional stimulus through rate cuts and renewed quantitative easing.
While a further deterioration on the trade front between the US and China looks unlikely before they meet in early October, we still view the path to a solution as being very long and difficult. China wants calm into the National Day Golden Week and 70th anniversary of the PRC on October 1. What happens afterwards remains to be seen, especially given the need for compromise, something that neither side has shown much appetite for up until now.
From a technical perspective, a drop to $1450/oz will be viewed as a weak correction within a strong uptrend. Only a break below $1380/oz which coincides with the ceiling that prevailed for almost five years up until June would change the outlook to neutral.
We maintain a bullish view on gold with the short-term focus on US economic data and central bank meetings before the focus returns to trade in October.