Fundamental Forecast for Gold:Neutral
Gold is off sharply this week with the precious metal shedding 1.7% to trade at $1298 heading into the weekend. The sell-off comes on the back of the strong performance in US equity markets with all three major stock indices closing higher by 1-1.7% on the week. We will take a more neutral tone heading into next week on the heels of this decline while noting a broader bearish bias below key resistance which was tested this week.
Looking ahead, traders will be closely eying the US economic docket and the ongoing geopolitical tensions in between Ukraine and Russia. Existing/new home sales, durable goods orders and the final April read of the University of Michigan confidence survey will be on tap next week. With the recent Fed rhetoric suggesting that the markets continue to overstate the timing of Fed normalization, look for weaker than expected data to support gold at the expense of the greenback. The gold vs USD correlation continues to press deeper into inverse territory, posting its lowest levels since march 24th and we’ll look for a reaction off key support at 10,400 in the Dow Jones FXCM USDOLLAR Index (Ticker: USDOLLAR) for further conviction on our directional bias.
From a technical standpoint, gold reversed off a key inflection point we highlighted in last week’s outlook at $1327. This level is defined by the March opening range low, the 23.6% Fibonacci extension taken from the advance off the December 31st low and a longer-dated trendline resistance dating back to the 2012 high. The resulting move saw the daily RSI signature turnover ahead of the 60-theshold, keeping our broader focus on the short-side of gold. Look for support at the monthly open at $1283 with a break below shifting our focus to a massive support range at 1260/70. This region has triggered substantial inflections in gold prices dating back to June of last year with multiple longer-term and medium-term fib ratios once again highlighting the technical significance of this range.
Bottom line: Key interim resistance remains at $1327 and we continue to favor selling rallies with only a breach/close above this threshold invalidating the broader downside bias. The biggest risk to our outlook remains a broader risk sell-off which could trigger haven flows into the perceived safety of bullion. Look for a break above 1891 in the S&P to signal the end of the correction off the April high.