- Gold prices correct into a deep resistance structure.
- US dollar expected to remain strong in an inflationary environment, Fed narrative.
Gold Update: The price of gold has started to consolidate the move on Thursday where the bulls jumped in as the US dollar pared back some gains the prior day. The US dollar was pressured a little bit by a rise in US weekly jobless claims. There should be solace taken, however, another report confirmed that US economic growth accelerated in the second quarter, at a 6.7% clip. Meanwhile, the markets will be in high anticipation of next week's Nonfarm Payrolls event that is expected to cement the case for the Federal Reserve to announce its tapering at the November meeting.
From a technical perspective, for the US dollar, there is not much in the way of room left until the monthly resistance that is near 94.65. A more technically probable trajectory is for a deeper correction. In this regard, the 50% mean reversion of the weekly candle is located at prior daily highs near 93.70. This leaves the potential for further upside in gold towards $1,780, but not before a testest of $1,750 in the coming sessions.
End of update
The gold price has made an impressive correction on Thursday from a technical demand area on the daily chart with XAU/USD rallying from a low of $1,722.29 to a high of $1,764.24. At $1,756, gold is up 1.72% at the time of writing.
The rebound in gold prices has occurred at the same time that the US dollar sank from a one-year high in what has been volatile trade over the past 24-hours. The US weekly jobless claims, and as investors consolidated gains after a steep rise the last few sessions, in part driven by a spike in US Treasury yields.
The market's narrative surrounding the Federal Reserve and its presumed taper of its monetary stimulus beginning in November has clashed with fears of a global slowdown. Last week, the Fed flagged interest rate increases may follow sooner than expected.
US dollar's safe-haven appeal
The US dollar has been an attractive safe haven option for investors and it remains the largest-held currency reserve by global central banks. It is seen as a defensive hedge against the fears of rising inflation expectations and bonds nor the yen nor gold are particularly attractive in a world of rising yields. However, corrections are commonplace following such a strong move as we have seen in the greenback. In the third quarter, the dollar is on track to post a 2.1% rise as September draws to a close.
US dollar's correction
Thursday's economic data made for a perfect storm for a correction in the greenback with US initial jobless claims rising for a third straight week to 362,000 for the period ending Sept. 25. Economists polled by Reuters had forecast 335,000 jobless applications for the latest week.
There is an emphasis on the US labour market with respect to taper timings, so it was welcome news for short term contrarian gold traders out there who had been looking for catalysts to confirm an anticipated correction from support in the $1,720s.
''Price action has remained largely contained relative to that of Treasuries and real yields, reflecting a cleaner discretionary and trend-following positioning slate in gold which should keep any weakness from morphing into a rout,'' analysts at TD Securities argued.
''At the same time, evidence is increasingly pointing to 'stagflationary' forces — a narrative that continues to capture share of mind, as participants look to a period of high inflation and slowing growth, but this has yet to translate into additional interest for gold.''
US dollar stronger for longer
On the other hand, analysts at Brown Brothers Harriman remain highly bullish on the US dollar which is a headwind for gold prices. ''The speed of this dollar move is quite frankly very surprising,'' the analysts said. ''Based on the previous experience, we believe that this period of dollar strength still has legs.''
With regards to US yields, the analysts target higher in the 10-year. ''It remains on track to test the May high near 1.70% and then the March 30 high near 1.77%. The real 10-year yield is also higher and at -0.85% is the highest since July 1. A break above -0.82% is needed to set up a test of the March 19 high near -0.59%. If this rise in US yields can be sustained, it is yet another dollar-positive factor to consider. Of note, the Fed Funds strip now has lift-off in Q4 2022 almost fully priced in.''
Gold technical analysis
''At this juncture, a daily bullish correction would be anticipated and based on current levels, the 38.2% Fibo retracement of the latest bearish impulse has a direct confluence of where the price might be expected to test. This comes in at an old support and 10 Aug highs, as illustrated in the chart below:''
However, the price has shot through that resistance and all the way to test the 16 Sep support block as follows:
From a weekly perspective, the outlook is as follows:
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