Gold bulls appear to have caught a break from this week’s blitzkrieg that sent the yellow metal’s prices to 10-month lows. The question is will it last?
And when will the pivotal moment come for a turnaround in the fortunes of those long on bullion?
As Phillip Streible, precious metals strategist at Blue Line Futures, said at the end of June:
“Gold has, without doubt, had a disappointing second quarter. But on the bright side, it’s probably right where it’s going to start rebounding.”
That, of course, hasn’t happened, with the most-active gold futures contract on New York’s COMEX having lost another $75, or 4.5%, from the near $1,810 level it stood at when Streible spoke.
But Streible, who did buy gold in the lower $1,800s in June, had simple yet profound words on gold’s likely behavior.
“It’s normally the case; people start giving up on gold, and then it comes back,” he said.
“The dollar's strength will likely dissipate once the Fed can no longer surprise us with its rate hikes. And then, bond yields will surge again, indicating inflation, which works well for gold.”
As of Thursday, the Dollar Index, which had a scintillating rally earlier this week to 20-year highs of 107.07, seems to have paused on its run.
The dollar is still up 12% this year, adding to last year’s 6% gain. The back-to-back annual gain in the US currency was for one reason only: bets that the Federal Reserve will embark on one rate hike after another to quell the monster of an inflation created from two years of money printing and runaway federal aid spending during the coronavirus pandemic.
Since March, the Fed has been delivering on those bets, raising rates three times from a range of zero to 0.25% in February to reach between 1.5% and 1.75% by June.
This week a Reuters poll of forex analysts showed that the dollar will likely remain strong for at least the next three months on expectations of aggressive Fed rate hikes and safe-haven appeal stemming from global recession fears. The central bank has another four opportunities before the end of this year to bring rates even higher, with the market expecting a final range between 3.75% and 4.0% for 2022.
The surging dollar has been an anathema to gold as the greenback and bullion covet the safe-haven crowd. So far, the dollar seems to be winning this race despite gold’s entrenched notion as not only a highly desirable metal for jewelry and other uses but also as a store of value.
Typically, gold and the dollar move in opposite directions—this week’s 10-month low in gold and 20-year high in the dollar being a good case. But the two occasionally move in tandem too, especially when both are being sought as safe-havens. It’s rare but it has happened.
So, the answer to when gold will rebound to recapture $1,800 and above has probably much to do with how the dollar—and, relatedly, bond yields—performs.
But there’s another burning question that gold watchers are carrying: Is the worst of the dollar-triggered sell-off over? Or how much lower can bullion go in the near term?
It’s crucial for shorts who want to take gold to $1,600 territory and below, that its sell-off doesn’t lose its momentum here.
Charts by skcharting.com with data from Investing.com
The answer, as charts from skcharting.com suggest, is that gold may already have, or is close, to bottoming out and probably has not too much more to lose.
“Gold is not far from the bottom,” said Sunil Kumar Dixit, chief technical strategist at skcharting.com, who uses the spot bullion price for his plotting. Adding:
“In the most extreme case, gold has another $50 to probably max $80 to lose from the $1,730.70 low of this week. But the more likely case is a drop of another $30 to $50 to reach a bottom of between $1,680 and $1,700.”
Despite the headline 10-month low for gold this week, the yellow metal has remained in a tight trading range of between $1,749 and $1,730.
Sustained down pressure from the $1,749 resistance can push gold for a retest of $1,730, exposing it towards troughs of $1,720-$1,700-$1,680.
In the worst-case scenario, the 50-month Exponential Moving Average of $1,667 and the 200-week Simple Moving Average of $1,650 will likely act as hard floor to boomerang gold higher.
Conversely, a short-term rebound targeting $1,760-$1,780 initially looks promising for gold.
The weekly stochastic reading of 3/11 and daily stochastic of 7/6 indicate extremely oversold conditions for gold and call for an immediate rebound.
Disclaimer: Barani Krishnan uses a range of views outside his own to bring diversity to his analysis of any market. For neutrality, he sometimes presents contrarian views and market variables. He does not hold positions in the commodities and securities he writes about.