Gold recovers on dollar weakness

THE gold market spent the week reacting to weakness in the US dollar. The story of gold's price movement this week was also primarily a reaction to the news headlines that weakened the dollar. The other key theme was optimism that US lawmakers would agree on a fiscal stimulus package for the Covid-19 pandemic.

Early in the week, gold futures were boosted by dovish comments from the European Central Bank on the need for more stimulus. The benchmark Comex GC Dec 20 contract reversed higher after technical support around the US$1,850 held during Asia trading on Monday, as traders looked ahead to the first of the US presidential debates, and precious metals futures rose.

Although the chaotic debate turned out to be a financial non-event, it did highlight the uncertainties ahead as investors shift their focus to the US elections.

Throughout the week, gold prices were pressured by the changing fortunes of the dollar and US 10-year notes. Gold prices finally rose above the US$1,900 handle on hopes that US lawmakers would finally agree on a new fiscal stimulus package. Hopes were however diminished as disagreement continued and gold prices fell back below US$1,900.

Central banks have started favouring other instruments rather than monetary stimulus. Gold was down about 4 per cent last month. Despite the recent pullback, we do see an upward trajectory for precious metals in the long term as central banks stick to dovish policies and real yields stay low. Global labour markets are weak and unemployment is expected to increase.

What should investors look out for in the longer term?

If an effective Covid-19 vaccine is available by the November US elections as claimed by the US president, that would be a game changer for gold. Unless an effective vaccine is made readily available, the possibility remains of a second wave or resurgence of the virus, especially in the northern hemisphere with the coming winter.

Gold would have continued safe-haven support from heightened US political tensions, US/China tensions, and the risks of a no-deal Brexit at year-end. The situation facing the EU commission is unprecedented as the British break rules agreed upon.

Technical Analysis for Comex December Gold Futures (GCZ20)

The short-term technical picture of gold futures has deteriorated in the bears' favour. Most short-term technical indicators on the daily charts are showing bearish signals. The 14-day RSI is also in bearish territory, with a rather flat trajectory suggesting that the recovery from last week's plunge is stalling. Medium-term indicators are also bearish with the MACD (moving average convergence divergence) index having a trajectory that points down, suggesting technical weakness.

For the Comex GC Dec20 contract, the major resistance at US$2,025 remains intact. Immediate resistance lies at the 20-day SMA at US$1,922 and at the 50-day SMA at US$1,955. Initial support is at US$1,861, followed by US$1,820.