Gold outlook: Metal turns positive after ECB’s dovish hike

• Gold outlook may remain bearish in the short-term until Fed pivots
• Gold outlook: Our long-term view remans bullish
• Gold technical analysis: Path of least resistance to downside unless 200-day reclaimed

Gold was lower earlier, but after nearing the key $1900 level it has bounced back to turn positive. The gains are probably driven in part by short-side profit taking and after the ECB signalled it is done with rate hikes, earlier. Indeed, gold in euro terms found strong support with XAUEUR bouncing sharply off its 200-day average. XAUUSD, on the other hand, was still below its 200-day average, which means it is at risk of suffering renewed falls should the US dollar extend its gains further, after rising for 8 consecutive weeks against a basket of foreign currencies.

Why has gold been struggling of late?

The opportunity cost of holding gold, a non-interest-bearing metal, has been rising due to the fact government bonds have been providing much better nominal yields of late. For gold to start shining again, we will need to see clear signs that the days of contractionary monetary policy are numbered, in particular from the Fed. For now, we are not quite there yet, as data continues to surprise to the upside. But while there is increased risk of further short-term weakness, the longer-term outlook remains bullish.

FOMC, BOE, SNB and BOJ all to come next week

The ECB kicked off the major central bank meetings with a dovish rate hike. Gold investors were looking out for signs that interest rates have peaked, and they got that from the ECB today, which alleviated some pressure from the metal. More central bank action will follow next week, with the Fed, BoE and SNB all set to announce their latest policy decisions. We will also have the latest global PMIs among other data highlights to look forward to. For gold investors, the Fed’s rate decisions will be key moving forward.  If the US central bank turns out to be more hawkish than expected, then this may keep gold undermined.

For now, incoming US data continues to point to a more robust economy than expected.

A day after US CPI inflation came in slightly hotter than expected in the August, PPI was also a touch stronger on the headline front at 1.6% y/y vs. 1.2% expected, although core PPI was in line at 2.2% y/y. The fact that retail sales (+0.6%) and unemployment claims (220K vs. 226K expected) also both came in better than hoped today means there is more reason why the Fed will maintain a contractionary policy in place for even longer.

On Friday, we will have more US data to look forward to in the form of the Empire State Manufacturing Index, industrial production and UoM Consumer sentiment survey, followed on Tuesday by building permits and housing starts.

Unless we see significantly weak numbers, the broad dollar strength should remain in place as we head into the Fed’s meeting on Wednesday.

While no policy changes are expected at the FOMC’s meeting next week, traders will be looking for clues with regards to the next meeting. If there’s a strong inclination in the policy statement, dot plots and/or Powell’s press conference towards a final hike before the year is out, then this should support the dollar, and potentially undermine gold.

For now, it is difficult to be too bullish on gold as the renewed surge in inflation may force the Fed to hike interest rates perhaps one more time before the end of the year. And with oil prices rising, this will further encourage them to keep monetary policy in contractionary mode and rates at these high levels for longer.

Gold outlook: Bullish long-term

That being said, there is no doubt that gold remains an attractive long-term investment in my mind. It is just that there is increased risk of a short-term correction due to the reasons mentioned. In the slightly longer-term outlook, we should see renewed strength come back to gold as central banks start loosening their monetary policies again. The other bullish argument for gold is that it is a haven asset. With fiat currencies have been devalued around the world due to high inflation, gold, often viewed as a good inflation hedge, should remain supported – which is why we saw a new record high earlier this year.

Gold short-term outlook bearish while it holds below 200-day average

Although it didn’t quite get to $1900, gold has bounced back. But the precious metal remains below broken support around $1915 to $1920 area, which means that the bearish trend is not over just yet.  The bulls must reclaim the technically important 200-day moving average to signal a reversal. But for as long as it holds below the 200-day, this will encourage the bears to sell into any short-term strength, given that the macro backdrop hasn’t changed much. All told, a break below $1900 still looks like a strong possibility. If that happens, the next downside target for the bears will be liquidity below the August low of $1885 next.

Source: TradingView.com

-- Written by Fawad Razaqzada, Market Analyst

Follow Fawad on Twitter @Trader_F_R

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