The battle for a shrinking global liquidity pool will heat up over the coming months and the US needs to attract an increased amount of funds to cover its growing deficit. The weaker dollar despite rising US bond yields this past week may indicate that investors worried about rising US funding requirements no longer find the current yield levels attractive at the current dollar valuation.
These developments may eventually see the greenback weaken, removing some of the recent pressure on emerging market countries struggling with their dollar debt at a time of rising interest rates. If this materialises, some profitable months may lie ahead for commodities as investors and funds turn short positions back into longs.
Gold has been rangebound around $1,200/oz for the past month while its room for maneuvering, as per the chart below, continues to narrow. At this point we maintain a neutral outlook while waiting for a trigger strong enough to take it out of the current range. The combination of a record short and some dollar buying fatigue leads us to believe that the upside eventually will be challenged.
First, though, we witnessed another pump-and-dump Friday after the failure to break above $1,212/oz combined with the dollar bounce and sterling slump led to renewed selling ahead of the weekend.
Key levels to look out for to the upside are $1,212, $1,224 and particularly $1,238/oz. A break back below $1,188/oz, however, could once again see the metal’s resolve being tested.