Gold shows signs of life, but remains in a range – Commodity News
October 3, 2018 3:26 pm
While gold has traditionally held the status of the safe-haven asset, investors shunned it aside in the midst of trade concerns lately, favoring havens like the yen instead. The precious metal did see some demand in recent days amid worries around Italy, but was still unable to break the relatively narrow range it established over the last few weeks. Going forward, gold’s performance will likely depend mainly on that of the US dollar, as has been the case for months now.
Paradoxically, gold prices remained completely unfazed by a severe escalation in trade tensions between the world’s largest economies in recent months. In fact, changes in investors’ risk appetite, which have traditionally been the primary driver for gold, have had little impact on the metal’s price lately. Instead, bullion prices have been responding almost entirely to movements in the US dollar. Since gold is denominated in dollars, a stronger US currency renders the metal more expensive for investors using foreign currencies, thereby weighing on its demand. Hence, gold has edged lower since April, as the greenback grinded higher – buoyed by a fiscally turbocharged US economy and consistent rate increases by the Fed.
Over the past six weeks, both the greenback and gold stabilized a little, with the latter trading in a range between $1180 and $1213 since August 17. Then on Tuesday, this pattern briefly broke. Gold posted notable gains as investors turned defensive amid risks in Italy, on a day when the dollar closed higher as well. Although bullion’s gains were not enough to break the aforementioned range, the fact it finally reacted to market concerns is encouraging, as it suggests short-sellers rushed to cover some positions on the first hint a rebound may be looming. Indeed, speculative positioning on gold remains at extreme bearish levels. This renders the metal vulnerable to an outsized positive reaction in case of any gold-friendly developments, as numerous investors may simultaneously rush to cover, or unwind their prior short positions.
So, what does the future hold for the “barbarous relic”? While developments in Italy may trigger some more reactions in the coming days, the situation doesn’t seem worrisome enough to drive gold prices more broadly. In other words, tensions between Italy and the EU would need to escalate much further to generate major moves in gold, which currently seems unlikely. Rather, the dollar’s performance will probably continue to be the overarching driver for the yellow metal. In this respect, the most important variable for the US currency’s near-term direction will likely be Friday’s employment report. A robust set of data – particularly on the earnings front – could lift the dollar and consequently weigh on gold, whereas a disappointment in the jobs figures could boost bullion by virtue of a weaker dollar.
Technically, gold remains within the $1180 – $1213 range, and a break in either direction is needed to alter the current neutral bias in the short-term. In case of a clear break above $1213, the next hurdle to provide resistance may be the $1235 zone, defined by the peaks of July 26. Even higher, the July 9 highs of $1266 would increasingly come into view.
On the downside, a move below $1180 could open the way for a test of the metal’s 21-month lows at $1160. If the bears manage to pierce that region too, attention would shift towards the December 2016 troughs, near $1225.
While gold has traditionally held the status of the safe-haven asset, investors shunned it aside in the midst of trade concerns lately, favoring havens like the yen instead. The precious metal did see some demand in recent days amid worries around Italy, but was still unable to break the relatively narrow range it established over the last few weeks. Going forward, gold’s performance will likely depend mainly on that of the US dollar, as has been the case for months now.
Paradoxically, gold prices remained completely unfazed by a severe escalation in trade tensions between the world’s largest economies in recent months. In fact, changes in investors’ risk appetite, which have traditionally been the primary driver for gold, have had little impact on the metal’s price lately. Instead, bullion prices have been responding almost entirely to movements in the US dollar. Since gold is denominated in dollars, a stronger US currency renders the metal more expensive for investors using foreign currencies, thereby weighing on its demand. Hence, gold has edged lower since April, as the greenback grinded higher – buoyed by a fiscally turbocharged US economy and consistent rate increases by the Fed.
Over the past six weeks, both the greenback and gold stabilized a little, with the latter trading in a range between $1180 and $1213 since August 17. Then on Tuesday, this pattern briefly broke. Gold posted notable gains as investors turned defensive amid risks in Italy, on a day when the dollar closed higher as well. Although bullion’s gains were not enough to break the aforementioned range, the fact it finally reacted to market concerns is encouraging, as it suggests short-sellers rushed to cover some positions on the first hint a rebound may be looming. Indeed, speculative positioning on gold remains at extreme bearish levels. This renders the metal vulnerable to an outsized positive reaction in case of any gold-friendly developments, as numerous investors may simultaneously rush to cover, or unwind their prior short positions.
On the downside, a move below $1180 could open the way for a test of the metal’s 21-month lows at $1160. If the bears manage to pierce that region too, attention would shift towards the December 2016 troughs, near $1225.
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