Gold had a roller-coaster week which left it close to unchanged for the period. This followed a mid-week sell-off when rising stocks, dollar and bond yields sent it looking for support. On Monday, we raised some concerns
about gold’s short-term ability to move higher after finding that hedge funds had cut what was a record bullish bets by 74% in just two weeks. With the tailwind from short-covering beginning to fade, we concluded that gold was increasingly in need of supporting fundamentals to carry it higher.
The above-mentioned reversal in the dollar, not least against the Chinese renminbi, combined with a steady increase in holdings across exchange-traded funds backed by gold, helped support a strong bounce which from a technical perspective has left the yellow metal with two key levels to focus on in the short term.
After finding resistance at $1,240/oz, the 38.2% retracement of the April to August sell-off, gold then challenged and found support at $1,211.6, the first line in the sand as per the below chart. We maintain a bullish outlook for gold and would only begin to worry about a deeper correction should the price drop below $1,192/oz.
A weaker dollar would not only support gold given its inverse correlation, it would also support a pick-up in demand from emerging market consumers and central banks who have suffered from greenback strength. However, next week’s US midterm elections will help determine the direction of the dollar and potentially also gold. Should Trump, against current expectations, lose both the Senate and Congress, his domestic agenda would be left crippled. Instead he would likely divert his focus towards his international agenda. Given his comment that a trade war is easy and winnable this could lead to a reduced appetite for seeking a compromise with China.
Gold traders are now focusing on $1211/oz and $1,243/oz for signs of the next move.