Gold is still set for its biggest monthly gain since January but it's back on the defensive against the unfriendly cocktail of a rising dollar, bond yields, and stocks. 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. So far these have failed to materialise and instead
US stocks are trading higher for a second day while the dollar has reached new highs against several currencies, not least the Chinese yuan. US Treasuries are also feeling the lack of love as stocks rally with the yield on US 10-year notes rising to 3.15% from a 3.06% low on Monday.
The yuan continues its grind lower towards the 7.00 USDCNY level. This area is under intense focus given the potential for what a break would signal, especiallyas trade tensions between the US and China only show signs of escalating further. Some key reading on that front:
NY Times: The Number 7 Could Make China’s Currency a Trade-War Weapon
Saxo Bank Head of FX Strategy John Hardy: Drop everything else, it’s only about USDCNY 7.00
After finding resistance at $1,240/oz, the 38.2% retracement of the April to August sell-off, gold is now challenging support with the first line in the sand at today's low of $1,211.6 followed by $1,202/oz. 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.