Gold has broken below the key line of support at $1300/oz. A test of this, the lowest level since the day of the Brexit result has been under way for some time now following the failure to break higher in response to price-friendly news.
Having traded sideways for the past three months and after failing to mount a strong challenge at multi-year resistance around $1,380/oz, it is now back to the drawing board. As we have just entered the final quarter following a 20% rally this year, it is now the short- to medium-term direction of the yellow metal that is going to be determined.
In our Q4 outlook released earlier this week, Saxo Bank chief economist Steen Jakobsen
Back in May, the correction from $1,300 to $1,200/oz was driven by a 33% reduction in bullish bets held by hedge funds in the futures market. During the same month, longer-term investors through exchange-traded products bought into the weakness and this eventually helped stabilise the market following a 38.2% correction of the rally seen up until then.
Create your own charts with SaxoTraderGO click here to learn more
Hedge funds increased bullish bets by 20% in the week to September 27 to 261,892 lots, some 12% above the peak position witnessed before the reduction seen in May. ETP investors have maintained near-steady holdings during the past two months, although a small uptick in demand has been witnessed during the weakness seen these past six days.
We maintain a constructive longer-term view on gold but the risk of a stronger dollar will create a challenge to XAUUSD with XAUEUR and XAUJPY potentially being the better performers. The gold market, it must be noted, hates the uncertainty surrounding the Federal Open Market Committee's rate hike intentions. Following better-than-expected economic data from the US this past week, the chances of a December hike continue to rise.
The negative bond yield environment, the US presidential election, and very low US real rates are likely to attract continued demand for gold – but not before we get a sense of how deep this correction is going to be. A quick jump and close back above $1,300/oz could be the first indication that pent-up demand has been triggered and this should help stabilise the market.
From a technical perspective, however, the downside risk – initially to $1,280 and more importantly $1,250/oz (38.2% of the December to July rally) – can not be ruled out. For the market to have enough momentum to break $1,380/oz, a correction was needed.
The main question now remains whether this is just a correction or something larger.
— Edited by Michael McKenna
Ole Hansen is head of commodity strategy at Saxo Bank