The outlook for gold has been under negative pressure for almost five months. With a sequence of lower highs and lower lows, selling into strength has been a successful trading strategy. The continued USD strength and higher real bond yields have fuelled this negative move on gold. However, since last week’s FOMC meeting, there has been a sense that a turnaround may now be setting in. The recovery has now brought the market towards a crucial moment in the medium to longer-term outlook.

  • A move dovish outlook on the FOMC has helped to turn the 
  • USD turning corrective and falling real yields are fueling the recovery
  • Technical indicators point to further recovery with crucial resistance at $1785/$1805 overhead

Fed’s dovish surprise

The Fed hiked by 75 basis points in last week’s FOMC meeting. However, this was seen as a “dovish hike”. The Fed has said that it will no longer be indicating future hikes, whereas the FOMC meetings will now be “data-dependent”.

The number of further hikes being priced has been cut significantly. Interest rate futures traders now only expect another 100 basis points (+1.0%) to be added. 

This has impacted bond markets. Treasury yields have fallen. The US 10-year yield is now below 2.70%. This is a key moment as it has completed a big top pattern and opens for further moves lower, possibly towards 2%. 

Conditions are now set up to drive a recovery in gold

It has also given markets the suggestion that the Fed has blinked in its fight against inflation. A nod more towards concerns over growth have driven inflation expectations higher.

Conditions are now set up to drive a recovery in gold

Higher inflation expectations as nominal yields are falling results in a decline in “real” bond yields. There has been a notable decline in the US 10-year real yield since the Fed meeting.

A continued USD correction is positive for gold

The charts above are important as they have implications for the USD and also for gold.

Falling real yields are negative for the USD. The USD and real yields have a traditional positive correlation (averages around +0.26 over the past 12 months). Certainly, over the past three months, the correlation has been consistently strongly positive.

Conditions are now set up to drive a recovery in gold

We also see that there is an important link between the direction of real yields and gold. Falling real yields are positive for gold. This is because gold is a zero-yielding asset. If real interest rates (bond yields minus inflation) are positive and/or rising, then the opportunity cost of owning gold increases. With real yields falling close to zero again, this is supporting gold. The lower real yields move, the better for gold.

Gold and real yields have a traditional negative correlation (averages -0.37 over the past 12 months).

Conditions are now set up to drive a recovery in gold

Turning therefore finally to Gold and the USD. Once more, there is a negative correlation. Gold is traded in USD. Subsequently, a stronger USD will mean investors get more gold for their buck, as it becomes cheaper.

For now though as the USD is falling back, this is positive for the gold price. Over the past 12 months, the correlation averages -0.32 but it has been strongly negative for several months. The longer the USD correction continues, the more this should benefit gold.

Conditions are now set up to drive a recovery in gold

Technicals pointing to a gold recovery

Gold (XAUUSD) has been recovering in recent weeks. There had been a pick up from the low of $1680 July low, with a rebound of over +5% in the price. This is the largest technical rally since the March rally (that rally faltered with a rebound extreme of 5.7%). We can see with this move that the momentum has recovered and is now the strongest in more than three months (daily RSI is well above 50). This backs the potential for a lasting recovery.

Breaking above $1745/$1752 resistance was important and this has now opened $1785/$1805 resistance. The barrier of the four-month downtrend is overhead (c. $1777) along with the 55-day moving average (c. $1799). This means that there is plenty of resistance overhead that needs to be overcome.   

Conditions are now set up to drive a recovery in gold

We are encouraged that once more this morning we have seen intraday downside being used as another opportunity to buy. With a continuation of falling real yields and a USD correction, the outlook for a gold recovery remains positive. Technicals point towards a test of the resistance at $1785/$1805. If this can be broken then it would open moves towards $1860/$1870. A failure below $1745/$1752 breakout support would be disappointing whilst below $1711 would increase the selling pressure again.

This material is for general information purposes only and is not intended as (and should not be considered to be) financial, investment or other advice on which reliance should be placed. INFINOX is not authorised to provide investment advice. No opinion given in the material constitutes a recommendation by INFINOX or the author that any particular investment, security, transaction or investment strategy is suitable for any specific person.