- USD turnaround spooks gold traders
- Dollar gains offset geo-risks, inflation
- 'Brick wall of resistance continues to cap the upside'
By Ole Hansen
NB: The blue slides are from my latest webinar. Replay can be found here.
Gold continues to drift lower as the market looks to the dollar for direction. The current strength of the dollar, driven by short-covering, rising bond yields and a slowdown in Europe, has rattled a market which previously held a general belief that the greenback would continue to weaken.
Using IMM currency futures as a proxy for the currency market, we find that the non-commercial dollar short position against nine major currencies in recent weeks climbed to a seven-year high before seeing a small retracement
With more than 80% of the dollar short being against the euro, recent developments – such as a rising yield spread and disappointing economic data from the euro area – have weakened the euro and left USD, at least in the short term, exposed to additional gains and subsequent headwind for commodities, not least gold and silver.
An overview of the drivers that tend to set the direction for gold shows how we are seeing no clear direction at this stage. Rising inflation expectations, an overall bullish commodity trend (late-cycle preference for commodities), geopolitical and financial risks are being offset by a rising dollar and rising real-rates.
Investment flows are currently mixed with hedge funds reducing longs in response to the lower price while exchange-traded products, mostly used by retail and long-term investors, continue to see demand. The current total holding of 2,341 tonnes is the highest since 2013 when gold traded 12% higher at $1,470/oz.
The Federal Open market Committee meets on May 2 and although no change is expected so soon after the March rate hike, some nervousness exists – especially with regard to the speed of future rate hikes. As the slide below shows, gold has handled previous rate hikes very well. An accelerated pace of rate hikes may, however, cause some problems... unless the move is driven by expectations of a pick up in stronger-than-expected inflation.
Safe-haven demand has faded in recent weeks, especially after the historic meeting over the weekend between leaders from North and South Korea. The threat of trade war between the US and China and more importantly the US and Iran remains in place and both could quickly reverse the current lack of focus.
A brick wall of resistance continues to cap the upside and multiple failures since 2016 in breaking above an area between $1,365 and $1,375/oz has left the market nervous with the focus once again on finding support.
The two key levels which will help determine the short-term outlook for gold are $1,300/oz followed by $1,280/oz. The potential success of these two levels in capping the downside at this stage is mostly in the hands of the dollar and its short-.term trajectory, together with news on Iran sanctions from the US with the May 12 deadline looming.
— Edited by Michael McKenna
Ole Hansen is head of commodity strategy at Saxo Bank