03 October 2017 at 14:33 GMT
- Data, rate hike forecasts, tax reform seen reducing focus on geo-risks
- 'Dollar and yields will determine where support is established'
- Gold on the defensive but no signs of accelerated selling seen so far
The referendum and constitutional crisis in Catalonia can now be added to the list of ambient geo-risks, but traders are not seeking safe-havens just yet. Photo: Shutterstock
By Ole Hansen
Gold has fallen to a six-week low in response to rising US yields and a stronger dollar. The anticipation of a December rate hike, US tax reform plans, together with data showing US manufacturing expanding at the fastest pace in 13 years have further helped reduce the focus on geopolitical risks.
With stocks at a record high, the VIX at a record low, and geo-risks at least temporarily fading, demand for diversification and tail-end risk protection have faded during the past couple of weeks.
Rising US real-yields and a weaker Japanese yen have both been non-supportive for gold since the early September peak. Last week's tax reform announcement by President Trump further added to the unease among funds who had been strong and continued buyers of gold during a nine-week period up until September 12.
The need to reduce bullish bets currently sets the tone but overall the direction of the dollar and yields will determine where support is eventually established.
Trump's rating recovered following last month's deal on the debt ceiling and the Harvey/Irma response. However the late Puerto Rico response, accusations of tax reform tailored to the rich, and now the potential of a new gun control debate have seen the administration's ratings slide once again. With that comes the risk of irrational behavior and ill-considered remarks – factors that have proved supportive in the past.
Adding to the list of geopolitical hot spots (apart from North Korea) we now have European political uncertainty following the Catalan referendum and Middle East concerns following the Kurdish vote for independence in Northern Iraq.
Gold remains on the defensive but so far there has been no signs of accelerated selling despite seeing it breach key technical levels. Today's weakness was arrested at $1,268/oz, the 38.2% retracement of the 2016-to-2017 rally. Further (down) trendline support and the 50% level will provide an additional layer of reinforcement.
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Source: Saxo Bank
— Edited by Michael McKenna
Ole Hansen is head of commodity strategy at Saxo Bank