Gold’s stay above $1300 could be short-lived

<p>Thanks to increased uncertainty about the US elections and a drop in the dollar, buck-denominated gold has been surging higher in recent days to reach […]</p>

Thanks to increased uncertainty about the US elections and a drop in the dollar, buck-denominated gold has been surging higher in recent days to reach north of $1300 today. The stock market sell-off has further supported the perceived safe-haven precious metal. However the stay above $1300 could be short-lived as I believe the dollar could make a comeback soon – if not this week then probably the week after.

Will the Fed prepare the market for a December lift off?

With US presidential election being just five days away, the Federal Reserve will almost certainly want to keep a low profile at the conclusion of the FOMC’s two-day meeting later on. Virtually no one is expecting to see a rate rise and there won’t be a press conference from Fed’s Chair Janet Yellen either. Instead, the focus will be on the wording of the policy statement and investors will be looking for clues about the prospects of a December rate hike. Up until the end of last week, the market appeared almost certain that a rate rise in December was inevitable. However, that changed as the FBI probe into Hillary Clinton’s emails increased uncertainty about the outcome of the elections. Those who were long the US dollar and equities saw this as an opportunity to take profit on their positions, especially considering the high-impact fundamental events of this week: the FOMC rate decision and US non-farm jobs report, among others. As the dollar and stocks went down, up went dollar-denominated and perceived safe-haven gold and silver.

Dollar selling justified in short-term

But is the dollar selling justified? I think to some degree, yes. No one can be certain about the outcome of the US elections and then the Fed’s possible response. Also, what if US data from now until the Fed’s December meeting turn really negative? Surely if that were to happen, the Fed may well hold off raising rates until again next year. Also, when paired against other currencies, the dollar’s short-term weakness makes more sense. For example, the fact that the Reserve Bank of Australia was deemed a lot less dovish this week has supported the AUD/USD, while the NZD/USD has been underpinned by strong employment figures in New Zealand and a rebound in dairy prices. What’s more, the overreaction in the GBP selling due to the impact of Brexit has supported the GBP/USD in recent days, while the USD/JPY has been undermined by safe-haven flows into the yen. So, when you look at the dollar in that sense then you can understand why it has been sold.

Dollar could make a dramatic return

However, the underlying fundamental strength of the dollar means any short-term weakness will likely be faded into by large institutional investors and hedge funds, those responsible for basically moving the markets. After all, the Fed remains the only major central bank looking to increase rates while the rest are still pretty much dovish across the board and will likely remain that way for the foreseeable future, especially in the case of the Bank of England and the Bank of Japan. Thus, in my view, the dollar could go higher, much higher, over the long term outlook.

Gold’s advance could get rejected at this $1300 critical juncture

The $1300/08 area for gold represents a major technical resistance zone. Previously, dips were bought here; now rips could be sold here. Time will tell. The 50-day moving average, which is now pointing lower, also comes into play in this area, as does the 61.8% Fibonacci retracement level against the most recent high. There is a potential therefore for the sellers to return here and push gold back down towards the previous support at $1277 and potentially beyond. On the other hand, if the sellers do not show up here in a meaningful way then a continuation towards $1321 could be the outcome: here the 78.6% Fibonacci level converges with the bearish trend line.

16-11-02-gold

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.