Gold Breakout Coming?
The biggest fundamental factor driving gold at the moment is the US dollar; typically stronger the performance of the dollar, the worse gold does and vice versa.
Given over the last few weeks USD has been consolidation within a 92.00-94.00 range (in the DXY), gold has mostly been in consolidation mode too. Indeed, since its volatile pumping then dumping back at the start of August, the precious metal has been unable to convincingly break back above the $2000 mark or below the $1900 mark.
Indeed, the trading range has been getting narrower and narrower since the beginning of the month (lower highs and higher lows), and a pennant structure seems to have formed. We appear to be approaching the squeeze point, meaning that if a breakout is to come, it is likely to come soon.
Which way will we be going if we do break out?
Much will depend on the dollar.
If the dollar remains subdued over the coming weeks, as I expect it to do so given the dovish tone of the FOMC this week, combined with the still largely positive risk tone of the market as global data improves, gold should remain supported.
Technical selling on a downside break of the pennant structure could take us as low as the August low around $1860, or even to the psychological $1800 mark. But with all the world’s major central banks PUMPING stimulus (which gold loves), the precious metal’s losses should not be too severe (as in, I would not expect gold to enter a bear market – meaning 20% down from recent highs).
If the break comes to the upside, we could certainly be back in the running for a test of recent all-time highs set around $2075. I would caution, however, that absent a resumption of the downward USD trend that we saw back in June, July and early August, gold will struggle to sustainably break beyond this level.
But I do expect USD to continue its downward trend of the past few months, even if at a slower pace; as noted above, the FOMC has set out its stance SUPER dovish - inflation will need to be back above 2% and looking like it is going to stay there for a long time, as well as full employment before the Fed even thinks about hiking… this is a long way off, and if inflation fails to pick up over the coming months, as many think it might if the US Congress continues to fail to agree on further stimulus, we could be in for more QE (a big USD negative).
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