Gold regains shine as threat of October volatility increases

In yesterday’s note, we reminded of the reputation that October has as a volatile month for equities, enhanced after the volatility episode of October 2018 that culminated in a 20% fall in global stocks over the final three months of the year. At the heart of the 2018 October volatility episode, rising interest rates coincided with an escalation in President Trump's trade war with China and slowing global economic growth. During 2019, the U.S. economy has weathered the impact of the trade war better than most, aided by the Federal Reserve cutting interest rates and a resilient consumer.

In yesterday’s note, we reminded of the reputation that October has as a volatile month for equities, enhanced after the volatility episode of October 2018 that culminated in a 20% fall in global stocks over the final three months of the year.

At the heart of the 2018 October volatility episode, rising interest rates coincided with an escalation in President Trump's trade war with China and slowing global economic growth. During 2019, the U.S. economy has weathered the impact of the trade war better than most, aided by the Federal Reserve cutting interest rates and a resilient consumer.

However, the overnight fall in the Institute for Supply Management Index (ISM) to 47.8, to its lowest levels since the Global Financial Crisis, has fuelled fears that ongoing weakness in the manufacturing sector will derail the resilient consumer and services sector of the U.S. economy. The link between manufacturing and the consumer, highlighted by the employment sub-index of ISM falling deeper into contractionary territory to 46.3.

The fallout from the weak ISM print has resulted in the seemingly Teflon coated S&P 500 falling by -1.30% to be on the verge of closing below the key 2940/30 support level and triggering the bearish case mentioned in yesterday’s article https://www.cityindex.com.au/market-analysis/will-the-sp-500-remain-teflon-coated-in-october/.

Should the S&P 500 bear case be triggered, gold (and gold stocks) offer a potential hedge. This is based on golds well documented safe haven qualities as well as on the technical setup outlined in this article in early September https://www.cityindex.com.au/market-analysis/at-what-level-is-gold-a-buy/.

Technical update: Overnight gold has bounced from the support offered by the wave equality “abc target” at 1462. In addition, a potentially bullish reversal daily candle has formed that provides the set up for a long trade.

Should gold continue to rally above the high of the reversal candle that formed overnight, it would be a positive development and warrant opening longs in gold on a stop entry at $1491.20. If the entry is triggered, the stop loss will be placed at $1457. The initial target for the trade is a retest of the September $1557 high with scope to > $1600.00.

Gold regains shine as threat of October volatility increases

Source Tradingview. The figures stated are as of the 2nd of October 2019. Past performance is not a reliable indicator of future performance.  This report does not contain and is not to be taken as containing any financial product advice or financial product recommendation

Disclaimer

TECH-FX TRADING PTY LTD (ACN 617 797 645) is an Authorised Representative (001255203) of JB Alpha Ltd (ABN 76 131 376 415) which holds an Australian Financial Services Licence (AFSL no. 327075)

Trading foreign exchange, futures and CFDs on margin carries a high level of risk and may not be suitable for all investors. The high degree of leverage can work against you as well as for you. Before deciding to invest in foreign exchange, futures or CFDs you should carefully consider your investment objectives, level of experience, and risk appetite. The possibility exists that you could sustain a loss in excess of your deposited funds and therefore you should not invest money that you cannot afford to lose. You should be aware of all the risks associated with foreign exchange, futures and CFD trading, and seek advice from an independent financial advisor if you have any doubts. It is important to note that past performance is not a reliable indicator of future performance.

Any advice provided is general advice only. It is important to note that:

  • The advice has been prepared without taking into account the client’s objectives, financial situation or needs.
  • The client should therefore consider the appropriateness of the advice, in light of their own objectives, financial situation or needs, before following the advice.
  • If the advice relates to the acquisition or possible acquisition of a particular financial product, the client should obtain a copy of, and consider, the PDS for that product before making any decision.

Join our live webinars for the latest analysis and trading ideas. Register now

GAIN Capital UK Limited (trading as “City Index”) is an execution-only service provider. This material, whether or not it states any opinions, is for general information purposes only and it does not take into account your personal circumstances or objectives. This material has been prepared using the thoughts and opinions of the author and these may change. However, City Index does not plan to provide further updates to any material once published and it is not under any obligation to keep this material up to date. This material is short term in nature and may only relate to facts and circumstances existing at a specific time or day. Nothing in this material is (or should be considered to be) financial, investment, legal, tax or other advice and no reliance should be placed on it.

No opinion given in this material constitutes a recommendation by City Index or the author that any particular investment, security, transaction or investment strategy is suitable for any specific person. The material has not been prepared in accordance with legal requirements designed to promote the independence of investment research. Although City Index is not specifically prevented from dealing before providing this material, City Index does not seek to take advantage of the material prior to its dissemination. This material is not intended for distribution to, or use by, any person in any country or jurisdiction where such distribution or use would be contrary to local law or regulation.

For further details see our full non-independent research disclaimer and quarterly summary.