07 September 2016 at 13:25 GMT
- Soft US data boost gold, weaken dollar
- Gold bounce the largest since Brexit vote
- $1,385-95/oz the key upside level for XAU
The dollar's loss is gold's gain as US data head south. Photo: iStock
By Ole Hansen
Gold has surged higher following a double dose of weaker US data. The big miss on ISM non-manufacturing yesterday surprised not only the market but also the Federal Open Market Committee who have been talking up the prospects of higher rates.
Instead of rising rates the market could begin focusing on a gold-supportive recession instead.
The battle at $1,300/oz last week was won by the bulls once the US job report printed a lower-than-expected number. This was followed by the lowest non-manufacturing ISM reading in six years yesterday.
This combination of events was the shock that the gold market needed to get back into gear, and the yellow metal jumped the most since the Brexit vote on June 23. Not only have these two data points reduced the need for a September rate hike, but they also helped weaken the dollar.
Lower US dollar and US real yields have been two major drivers behind the gold surge witnessed this year.
From a technical perspective, gold once again "only" managed to correct by 38.2% of the latest rally. Back in May the correction was halted at $1,200/oz, which represented a 38.2% retracement of the rally from the December low to the May 2 peak at $1,304/oz.
This time around, support was found at $1,305/oz and once again, the retracement from the post-Brexit high amounted to 38.2%.
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Source: Saxo Bank
A correction of this magnitude is considered to be a shallow correction within a strong trend and that sends a signal that the rally is not over yet.
From a technical perspective, the attention is now turning to $1,355/oz – the trendline from the June high – and more importantly the $1,385-95/oz area. A break through here would take out the June high, the 2014 high, and extend the recovery of the 2011-14 selloff beyond 38.2%
ETP investors are once again accumulating gold holdings after the biggest two-day reduction so far this year last Thursday.
Hedge funds reduced the net-long by another 10% in the week to August 30. The position at 238,152 lots remains elevated from a historical perspective but as long key support levels continue to hold, funds would see no reason to make any major reductions.
— Edited by Michael McKenna
Ole Hansen is head of commodity strategy at Saxo Bank