Gold stability point to drop in dollar or stocks

Gold’s performance relative to the dollar has been respectable in recent days. Although it hasn’t gained significant ground – far from it – the metal hasn’t exactly fallen off a cliff either. Yet the dollar has been able to rise against a number of currencies during the same time, hitting a four-month high against the euro, for example, on Tuesday. The precious metal has been able to hold its own rather well when you also consider the fact that a number of global stock indices have either climbed to new record territories or reached multi-year highs. In other words, gold has defied gravity: when both the dollar and risk appetite rise, the buck-denominated safe haven metal typically falls out of favour. Gold’s performance therefore could point to either a period of “risk-off” trading environment and/or a dollar sell-off. Clearly some investors must believe that, otherwise why tie up your capital into something that pays no interest and costs money to store at a time when equity indices and now Bitcoin are hitting new highs almost on a daily basis? But if gold is indeed trying to find a base around its current levels, then we will need it to push up quickly to show that the buyers have stepped in. Conversely, if it continues to make no progresses then consolidation could lead to a sharp drop as short-term ‘oversold’ conditions would have unwound through time rather than price, giving the bears fresh reasons to push the sell button amid the unfavourable macro dynamics currently facing the precious metal.

Overall, though, I am beginning to lean more towards the bullish than bearish arguments for gold as far the short-term outlook is concerned. Equity market could finally stage a correction soon now that the earnings season is drawing to a close and after their extended bullish run. If so, this should help to boost the appeal of safe haven gold. As a far as the dollar is concerned, the Fed’s balance sheet reduction plans and a highly likely rise in interest rates in December should be mostly priced in by now. What’s more, the new Fed President, Jerome Powell, is considered to be a dove. So, without further significant improvement in US data or a significant deterioration in economic developments in one of her largest trading partners like the Eurozone, the dollar may struggle to gain further ground. In fact, the EUR/USD pair may actually come back strongly due to ongoing improvement in economic conditions in the single currency block, which should put upward pressure on inflation over time and thus increase pressure on the ECB to tighten its belt sooner than expected. The rising crude oil prices may help underpin the Canadian dollar, which could undermine the USD/CAD, while the GBP/USD could remain supported from rising levels of UK inflation. So, there are reasons why the dollar could actually fall back even if the Fed remains one of the most hawkish central banks out there at the moment. If the dollar and/or the equity markets drop, then buck-denominated gold could benefit.

Obviously one should never forget the physical demand and supply dynamics of gold. Demand for the precious metal typically rises before the Hindu festival of Diwali and during the Indian wedding season, which runs from October through December. Around 20 million weddings take place in India annually which means there will be lots of demand for jewellery, in particular gold. The yellow metal is a symbol of wealth, prosperity and security, not just in India but across the world, though especially in India and China - the world’s largest consumers of gold. That being said, it will be some time before one can assess the level of jewellery demand during the Indian wedding season.