Gold set to resume rally amid renewed falls for yields and stocks

Gold has been one the main beneficiaries from Tuesday's publication of a very poor US manufacturing PMI report, which caused havoc in the markets. The news hurt stocks and the US dollar, causing bond yields to fall as investors sought the relative safety of government bonds. Dollar-denominated and safe-haven gold thus found itself in unexpected demand after falling noticeably in the previous days. With yields falling again, this also helped to boost the noninterest-bearing metal’s appeal on a relative basis.

Now, in the event this week’s upcoming US macro pointers disappoint expectations as well, or otherwise fail to sharply reduce the odds of another rate cut at end of this month, then gold stands ready to benefit further, given the current favourable macro conditions with major global central banks being in easing mode. According to the CME Group’s FedWatch tool, the probability of a 25-basis-point rate cut from the Fed is currently almost at 64%, up sharply from about 50-55% last week, following the publication of the manufacturing PMI report and the inevitable tweet from Donald Trump in which the US President once again criticised the Fed and blamed the central bank for the downturn in manufacturing activity.

Sellers getting trapped?

Source: Trading View and City Index.

There is no doubt that gold’s long-term technical outlook is positive, even after what was a relatively small retracement that began at the start of September. And we are now expecting the precious metal to potentially resume its long-term rally. Remember, gold had risen sharply for four consecutive months prior to the hiccup in September. So the recent weakness should be put into perspective.

Now some would argue that (1) gold should retrace back to the point of origin of that long-term breakout around $1350 before continuing higher, while (2) others point to the fact prices had created a “Head and Shoulders” reversal formation during its consolidation pullback in September, as can be seen on the daily and lower time frames. In both cases, the metal “should” be falling, they argue, especially with the Dollar Index continually hitting new 2019 highs (until Tuesday's reversal).

Well, my response to the above points are as follows:

First, as far as point (1) is concerned, if gold prices were to go back THAT far to retest the point of origin of the breakout from the 6-year-old resistance range, then why can’t it continue going lower? After such a lengthy period of consolidation and the subsequent breakout, gold ‘shouldn’t’ go back that deep if that was truly a major breakout that we have witnessed. As I believe that was a major breakout, I don’t expect gold to revisit $1350s any time soon – unless something changes fundamentally.

With regards to point (2), it is important to point out that the head and shoulders formation that was formed on the daily only took just over a month to take shape. Now compare this with the breakout from 6 years of major resistance. Which one do you think is more important? If you agree that the latter is, then the breakdown of the neckline of the H&S pattern at around $1485/90 area could turn out to be a major bear trap. So, the bulls should be happy if we go back above it and hold there.

In fact, the bears may have already gotten trapped following Tuesday's rebound when gold formed a piercing candle formation on the daily. Tuesday also marked the first day of the month, when gold prices briefly broke below the low from September. So, was this brief break down and the sequent rebound THE trap? If so, then the next big pool of liquidity that price may gravitate towards would be the area above September’s high at $1555.

But first thing is first: the bulls need gold to show confirmation that it has indeed turned the corner. A break and hold above the daily H&S neckline around $1485/90 is a must. Otherwise, the downside pressure could persist for a while yet.

Source: Trading View and FOREX.com.

This report is intended for general circulation only. It should not be construed as a recommendation, or an offer (or solicitation of an offer) to buy or sell any financial products. The information provided does not take into account your specific investment objectives, financial situation or particular needs. Before you act on any recommendation that may be contained in this report, independent advice ought to be sought from a financial adviser regarding the suitability of the investment product, taking into account your specific investment objectives, financial situation or particular needs.

StoneX Financial Pte. Ltd., may distribute reports produced by its respective foreign entities or affiliates within the StoneX group of companies or third parties pursuant to an arrangement under Regulation 32C of the Financial Advisers Regulations. Where the report is distributed to a person in Singapore who is not an accredited investor, expert investor or an institutional investor (as defined in the Securities Futures Act), StoneX Financial Pte. Ltd. accepts legal responsibility to such persons for the contents of the report only to the extent required by law. Singapore recipients should contact StoneX Financial Pte. Ltd. at 6826 9988 for matters arising from, or in connection with the report.

In the case of all other recipients of this report, to the extent permitted by applicable laws and regulations neither StoneX Financial Pte. Ltd. nor its associated companies will be responsible or liable for any loss or damage incurred arising out of, or in connection with, any use of the information contained in this report and all such liability is hereby expressly disclaimed. No representation or warranty is made, express or implied, that the content of this report is complete or accurate.

StoneX Financial Pte. Ltd. is not under any obligation to update this report.

Trading CFDs and FX on margin carries a high level of risk that may not be suitable for some investors. Consider your investment objectives, level of experience, financial resources, risk appetite and other relevant circumstances carefully. The possibility exists that you could lose some or all of your investments, including your initial deposits. If in doubt, please seek independent expert advice. Visit www.cityindex.com/en-sg/terms-and-policies for the complete Risk Disclosure Statement.

ALL TRADING INVOLVES RISKS. LOSSES CAN EXCEED DEPOSITS.

City Index is a trading name of StoneX Financial Pte. Ltd. (“SFP”) for the offering of dealing services in Contracts for Differences (“CFD”). SFP holds a Capital Markets Services Licence issued by the Monetary Authority of Singapore for Dealing in Exchange-Traded Derivatives Contracts, Over-the-Counter Derivatives Contracts, and Spot Foreign Exchange Contracts for the Purposes of Leveraged Foreign Exchange Trading. SFP is also both Derivatives Trading and Clearing member of the Singapore Exchange (“SGX”). SFP is a wholly-owned subsidiary of StoneX Group Inc.

The information provided herein is intended for general circulation. It does not take into account the specific investment objectives, financial situation or particular needs of any particular person. You should take into account your specific investment objectives, financial situation or particular needs before making a commitment to invest, including seeking advice from an independent financial adviser regarding the suitability of the investment, under a separate engagement, as you deem fit. No representation or warranty is given as to the accuracy or completeness of this information. Consequently, any person acting on it does so entirely at their own risk.

The information does not represent an offer of, or solicitation for, a transaction in any investment product. Any views and opinions expressed may be changed without an update. To understand the risks and costs involved, please visit the section captioned “Important Information” and the “Risk Disclosure Statement”.

The information herein is not directed to, or intended for distribution to or use by, any person or entity who is a citizen or resident of or located in any locality, state, country or other jurisdiction where such distribution, publication, availability or use would be contrary to law or regulation.

StoneX Financial Pte. Ltd. 1 Raffles Place, #18-61, One Raffles Place Tower 2, Singapore 048616. Tel: 6309 1000. Co. Reg. No.: 201130598R.

This advertisement has not been reviewed by the Monetary Authority of Singapore.