Gold Consolidation Continues As Traders Consider What Will Drive The Next Move

London (Sept 14)  The outlook for gold has become increasingly neutralised over recent weeks. A pick up for the dollar is still expected to be only near term before renewed selling pressure is likely in the coming weeks and months. Subsequently, with the ongoing negative correlation with gold, we expect gold will retain an upside bias and near term weakness will be a chance to buy. Will it be this week’s Fed meeting to drive the next move?

Fundamentals/Newsflow

Gold is ranging. This comes as its traditional correlation markets are also ranging.

The correlation with the US dollar seems to be the strongest right now, with the 21 day Correlation calculation at -0.62. It is interesting to ee that the dollar has been stuck in a range between 91.73/94.00 on US Dollar Index since early August. This comes as the rally on gold has moderated, with the market settling in a range between $1902/$2015 in the past five weeks.

It is clear that dollar moves are still very important for gold. We expect that the dollar rally is still likely to be short-lived and that selling pressure will resume in due course. The meeting for the Federal Reserve could be the next catalyst for a move on the dollar. The big question that traders will be asking the coming days is how much has now been priced into Fed policy in the wake of Jackson Hole?

Treasury yields are also key. The correlation with the US 10 year Treasury yield and the gold price may have moved to zero (ie. no correlation) recently. However, this has come as yields have lost their trend in recent weeks. It leaves both yields and gold effectively ranging for now.

Our expectation is that the ongoing dovish positioning actions of the Federal Reserve will keep a lid on Treasury yields which by extension will underpin gold. This week’s FOMC meeting is the next opportunity for volatility on yields to take off, and therefore, some moves on gold are likely to also result. Given the market has been signalled the dosh lower for longer Fed policy, we could see limited upside risk. We would though see any weakness on gold to be a chance to buy as we do not expect yields to drive sustainably higher moving forward.

Looking longer term, we believe the outlook for gold will be driven by Federal Reserve monetary policy outlook. Fed chair Powell’s Jackson Hole speech suggested a willingness to accept higher inflation and not hike rates will help to underpin gold in the months and likely quarters to come. Continued looser for longer global monetary policy will keep real yields subdued/negative and should mean that gold remains attractive. Subsequently, this is still a good environment to be buying gold into supported weakness.

Investing.com

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