Gold’s month-long recovery following the early August collapse is showing signs of running out of steam after the price once again failed to penetrate an area of resistance towards $1835. Precious metals jumped on Friday following a surprisingly weak US job report, which initially helped weaken the dollar, and while silver managed to break higher, gold’s attempt once again fell short, just like it has done on six previous occasions since mid-July.
While the timing of the Fed taper may have been delayed by the recent weakness in data leading the prospect for zero US growth in the third quarter, gold has for several reasons so far failed to capitalize on this emerging tailwind. First of all, the continued strength in global stocks reduces the need for diversification and secondly, the dollar has yet to break support following its recent upside rejection. In addition and despite the recent economic data weakness, a heavy treasury bond auction calendar combined with rising wage pressures has been sending bond yields higher, thereby further reducing the short-term prospects.
Real yields, currently around -1% is at risk of rising further but as we have mentioned in previous updates, the dislocation between gold and real yields this summer, could justify a 20-25 basis point rise in yields without negatively impacting gold to much. Whether or not that plays out remains to seen, but in our opinion it makes us believe the direction of the dollar, more than yield developments, should be the main short-term focus.