This website uses cookies to provide you with full functionality and the best possible user experience. By continuing to use this website you agree to our cookies policy. Find out more. Close

Gold Undermined by Rallying Equities, Dollar

by Fawad Razaqzada

The rallying equity markets and firm US dollar is proving to be a toxic mix for the buck-denominated and perceived safe-haven gold. After eking out a small gain for the month of July, the metal started August on the front foot last week before turning decisively lower on Friday in response to the US jobs report, which came out much stronger than expected. The precious metal has started this week little-changed so far, but unfortunately things could turn ugly for gold in the days and weeks to come.

While the historically low and negative yields are meant to be positive for non-interest bearing assets like gold and silver, unfortunately for the metals, this is an even more positive environment for the higher-yielding equity markets. In addition, US quarterly earnings results have been generally better than expected, making equity more attractive than safe haven assets. What’s more, the dollar has been able to maintain its bullish bias on renewed speculation about another rate increase from the US Federal Reserve later this year after the weakness in the jobs market at the start of the summer proved to be a blip rather than a change in the trend. Other macro pointers from the world’s largest economy have generally been positive, too. This week we will find out – in the form of retail sales, consumer sentiment and retail earnings results – whether the strength in the labour market has been strong enough for the American consumers to loosen up their purse strings. If so, one would think that both the US dollar and equity prices will be able to extend their gains, which should be further bad news for gold. Conversely, gold could find some support if there is no evidence of rising consumer spending and confidence.

Meanwhile from a technical point of view, gold’s repeated failure to break conclusively above its central bearish trend line that has been in place since September 2011 is also very significant. The precious metal continues to run into offers around $1367, a level which marks the 161.8% Fibonacci extension level of the previous corrective swing. What’s more, the momentum indicator RSI is now trending lower on the weekly time frame after it had climbed to the “overbought” threshold of 70 and higher a few weeks ago.

Put another way, gold has reached an exhaustion point around a long-term key resistance area. So, in theory, then, gold may start to head lower now. If this view is correct, traders should anticipate support levels to break down, potentially leading to further sharp down moves over time. But if this hypothesis is not correct, then we should see some false breakdown scenarios, which could provide decent buying opportunities. Whatever is the case, traders may wish to observe price action closely in the coming days. They should let price dictate direction and then trade in the direction of the near-term trend, which we think is going to be bearish. But in the very short-term outlook, expect to see some oversold bounces too as the trend has not yet turned bearish.

fawad-razaqzada-gold-2016-08-09

From time to time, GAIN Capital UK Limited’s (“we”, “our”) website may contain links to other sites and/or resources provided by third parties. These links and/or resources are provided for your information only and we have no control over the contents of those materials, and in no way endorse their content. Any analysis, opinion, commentary or research-based material on our website is for information and educational purposes only and is not, in any circumstances, intended to be an offer, recommendation or solicitation to buy or sell. You should always seek independent advice as to your suitability to speculate in any related markets and your ability to assume the associated risks, if you are at all unsure. No representation or warranty is made, express or implied, that the materials on our website are complete or accurate. We are not under any obligation to update any such material.

As such, we (and/or our associated companies) will not be responsible or liable for any loss or damage incurred by you or any third party arising out of, or in connection with, any use of the information on our website (other than with regards to any duty or liability that we are unable to limit or exclude by law or under the applicable regulatory system) and any such liability is hereby expressly disclaimed.

Don't have an account?

Open a trading account with us and start trading forex.

Create an account

Got some trading ideas?

Make the most of any trading opportunity

Log in and Trade

Contact us: