Daily Digest:
w/c 17 June 2024: The US data highlight this week is Retail Sales on Tuesday, with global Flash PMI data on Wednesday. Plus on the central bank side we get the RBA, PBoC, SNB and BoE all in play

Gold has become the summer range play

Intermediate

The outlook for gold remains closely tied to the direction of the dollar. The recovery in the US dollar in the past couple of weeks has been negative for precious metals. Although gold may be holding up better than others in the precious metals space, it is still struggling amid a resurgence in the USD. However, I do not expect this to be sustained. It is likely to be a move that accentuates a trading range in gold, rather than proves to be decisively directional. Gold has become a summer range play.

  • The USD has strengthened, weighing on gold
  • It could be a volatile week for gold
  • However, USD gains may become limited, limiting gold downside
gold/USD

USD has strengthened, weakening precious metals such as gold

In recent weeks there has been a shift in the consensus of the US economy. As activity indicators have stabilized the crowd is no longer looking for the economy to dip into recession. We were even told during the July FOMC announcement that the Federal Reserve staff do not anticipate a recession around the turn of the year. This has induced a recovery in the USD.

A sharp run higher in US Treasury yields (especially with longer duration bonds) has also been seen as Fitch Ratings has downgraded the US sovereign credit rating to AA+. An increase in safe haven flows has played into a USD rebound.

This USD strengthening amid a deterioration in risk appetite has significantly weighed on the prices of metals commodities. Platinum, Palladium and silver have all accelerated lower. Looking at the performance of gold over the past three months, it becomes clear that gold remains a far lower beta play as a precious metal than compared with its more volatile peers. However, it is still susceptible to the renewing strength of the USD.

Metals

As such, gold remains strongly negatively correlated with moves in the USD. Aside from a brief period during June, where gold and the USD both fell, the two have retained an extremely strong negative correlation throughout the past 12 months. The strong negative correlation is once more back in play now as the northern hemisphere summer holidays take hold.

Correlation

Volatility is likely and gold could test key support again

We have seen gold falling in the past two weeks. If the USD continues to strengthen, this decline in gold could continue. We are likely to see volatility in the coming days, especially towards the end of the week.

A key auction of longer duration Treasuries is scheduled for and this is likely to ramp up volatility in Treasuries, the USD and by extension, gold. The USD positive move has come as yields have pulled higher in recent weeks. If yields spike higher again following the bond auction, then we can expect that the USD will strengthen again. Given the consistent negative correlation, gold will therefore likely come under further corrective selling pressure.

A range play on gold is likely to continue

I talked previously about the gold price rallying on the shift to a less hawkish Federal Reserve. However, what has since transpired is that the US economy has proved to be more resilient than many had anticipated. Despite a continued feeling of a less hawkish Fed, the resilience of the economy has reversed the USD downside move. These conflicting forces are likely to mean that the USD will continue to fluctuate.

However, these USD fluctuations are being mirrored in the gold moves too. With these mirrored fluctuations in the price of gold, we have seen a trading range develop on Gold futures. The gold rally of early July has turned lower from $1978 and the outlook looks to be far more rangebound now.

Looking at the technical analysis suggests that the support of the range (which is at $1892.50 on Gold futures) could come under pressure in the coming days. However, just as I do not expect the USD to build an ongoing trend of recovery, I expect this range in Gold futures to broadly hold firm.

Gold Futures

The near-term outlook is negative. Lower highs and lower lows of recent weeks are reflected in the deterioration in the Relative Strength Index. A move into the low 40s on the daily RSI also has downside potential to the range lows around 35. A move below last week’s reaction low at $1920 (after the mixed Nonfarm Payrolls report) would open the $1892.50 June low.

Although there is near-term downside potential, the reaction to the $1892.50 low will be key. The range low is around the support of the rising 200-day moving average and a breach would suggest a decisive shift towards a negative medium term outlook. I do not think this will happen and if it does, I do not believe that it will be sustained. Instead signals for the USD points towards a summer of fluctuations to continue. Subsequently, that will also mean that Gold futures will also continue to fluctuate. This multi-month range between $1892/$1983 will therefore likely hold firm.

Editor

Richard is an independent market analyst with over 20 years of experience working for brokers in London. Most recently he has worked with Hantec Markets and Infinox, focusing on trading education, ana... Continued

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