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With US growth likely at a peak and as good as it gets, gold longs partly flushed out, positioning paired back and sentiment as bearish as we’ve seen for years, could we be seeing a low?
Tactically, I feel it is too early to see a resumption of a lasting bull trend and I am in favour of selling rallies into $1925. However, I am also incredibly enthused by the resilience of gold to ‘only’ decline $100, despite rising US bond yields and a stronger USD.
Unless the investment case radically changes – which I lay out below – the risks are skewed for near-term downside, although there is a growing potential for a reversal and strong rally into year-end.
Since rejecting the $1981 supply zone on 20 July the ensuing bear trend seems to have hit exhaustion, with gold shorts starting to pair back exposures – there is a risk a short covering could take price into the 38.2% fibo of the $1987 to $1884 decline at $1925, which could offer better levels to initiate swing shorts.
Trading intraday has been a challenge for many day traders as volatility has been so low – Gold’s 30-day realised volatility has fallen to 8.3% and the lowest since July 2021. We also see the 5-day average high-low trading range at $14.11; one of the lowest daily ranges for years. Traders need to adapt to these tighter ranges, and many have traded with a tighter stop and increased position size to accommodate for the low vol.
One can easily justify these sanguine conditions given the investment case for the bulls has been lacking. For gold to reverse higher these dynamics need to shift. Notably:
Looking beneath the surface, we can see a solid flush out of bullish gold positioning – longs have been paired right back. But has positioning swung too far, and could this offer an entry to look more favourably at upside potential?
As Richmond Fed President Thomas Barkin said on 22 August, the US economy could accelerate further, which could hold big implications for Fed policy and challenge the consensus of easing growth and potential rate cuts. While we continue to watch global growth data points, we could also feasibly see US headline inflation accelerate higher in the August CPI print (released 13 Sept) from 3.2% to 3.6%. This could result in increased expectations of a November rate hike (from the Fed), which could lift the USD and real yields.
Gold would likely face another leg lower in this dynamic, but would also likely see volatility pick up and trading ranges expand – a more compelling dynamic for CFD trader
However, should inflation pick up near-term, resulting in the Fed likely to hike again, it would then accelerate the belief in lower demand and increased recession risk. It is here where expectations of interest rate cuts would increase as higher rates and a higher-for-longer stance from the Fed should accelerate the risk of recession in 2024.
If and when we see growth data points subsequently roll over, resulting in additional rate cuts priced for 2024, then gold could feasibly have a strong rally into year-end. As always, an open mind to changes in economics and the subsequent investment case for gold will serve traders well.
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