Analysts turn bullish after market doubles

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Flash crash shows why it’s tough to be bullish on gold right now

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Gold’s swift drop to the lowest since March has highlighted a tough truth for the precious metal – there’s a growing list of reasons to be gloomy.

While Monday’s flash crash was exaggerated by a combination of technical factors and poor liquidity, the initial trigger remains true – strong US jobs data showed the world’s largest economy is well on its way to recovery. That sets the stage for the tapering of stimulus by the Federal Reserve, potentially removing one of the key drivers that helped send gold to a record last year.

A strengthening dollar, plus growing expectations that inflation will prove manageable, are adding to the headwinds. Exchange-traded funds have also cut their holdings significantly this year. Gold traded 1% lower at 8:30 a.m. in New York, after earlier tumbling as much as 4.1%.

Investors will now turn their attention first to the US inflation data scheduled for later this week, and then ahead to signals from Fed officials at the the Jackson Hole conference later this month. The timing of tightening by the US central bank is key, and hawkish talk from Chair Jerome Powell could spell the start of a definitively bearish market for bullion.

Is it downhill from here for gold? Here are five key charts to watch:

NO HYPE

Gold’s drop after payrolls beat expectations on Friday was triggered by a sharp rise in inflation-adjusted Treasury yields, which determine the opportunity cost of holding the non-interest bearing metal.

But when yields dropped deeper into negative territory in the past month, gold prices failed to benefit.

That shows just how negative sentiment has become for bullion after the metal’s relatively poor performance this year. Gold is an asset that thrives on momentum, and can be left vulnerable if the price fails to rally for a long time. Further rises in real rates driven by strong economic data could spark more precipitous drops.

DOLLAR’S RETURN

A major driver of gold’s strong performance last year was a protracted weakening of the dollar. Fast forward to 2021 and there’s signs we may see that trend reverse, putting pressure on bullion.

Strong US jobs data raised expectations for Fed rate hikes, giving the dollar its biggest gain in about a month on Friday. Meanwhile money markets indicate the European Central Bank won’t tighten until at least mid-2024. That sets the stage for a stronger greenback, which would hurt gold.

INFLATION FADING

Whether rising prices associated with economies reopening will prove transitory or persistent has been a major theme for markets in 2021. Gold’s relationship with inflation is complicated – it’s often touted as a hedge against runaway price gains, but has historically tended to benefit mostly when they coincide with periods of high unemployment.

So far, the market is pricing in transitory inflation, as demonstrated by the falloff in US breakeven rates further down the curve. That would imply healthy and controlled price increases which wouldn’t benefit gold. The consumer price index due Wednesday will prove the latest gauge for investors, and is expected to be muted compared to previous months.

“It’s hard for it to be bullish for gold at the moment,” said Marcus Garvey, head of metals strategy at Macquarie Group. “If it does soften and show that some of the recent price gains are easing, then there’s less upward impetus for inflation. But that doesn’t really reduce taper expectations because inflation is already sufficient to be ticking the box.”

TECHNICALS

Gold’s plunge earlier Monday has broken below the neckline of a weekly head and shoulders pattern that may embolden bears in the medium term. Unless gold ends the week above the neckline, which currently lies at approximately $1 760, the outlook would remain weak based on the technical analysis.

Prices also tested and broke below the 100-week simple moving average, before pulling back. This average has offered support to prices most times since the Dec 2015 low. It lies at $1,738 for this week and will be watched closely by bulls and bears alike.

ASIAN SUPPORT

A silver lining for gold could be a revival of jewellery buying in key markets like India. While demand there was hammered earlier this year by the emergence of the delta variant of coronavirus, rising imports show appetite for gold may be starting to pick up.

That won’t propel the metal to higher prices, as jewellery merchants tend to wait for dips to buy in new stock. But it should help support the market as Western investors sell-up.

Crude Oil Price Update – Bullish API Report Could Drive Crude into $69.69 – $70.76 Retracement Zone

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U.S. West Texas Intermediate crude oil futures are trading higher late in the session on Tuesday and shortly before the release of the American Petroleum Institute (API) weekly inventories report at 20:30 GMT.

The rally is likely being fueled by short-covering and profit-taking following a steep decline. Although gains are likely being limited by concerns over demand destruction caused by the surge in COVID-19 Delta variant cases, traders seem a little more optimistic that demand will eventually improve in Europe and the United States as more vaccinations are distributed.

At 18:59 GMT, September WTI crude oil futures are trading $68.57, up $2.09 or +3.14%.

Today’s API inventories report is expected to show that U.S. crude, gasoline, and other product inventories are likely to have dropped last week, with gasoline stocks forecast to fall for a fourth consecutive week, a preliminary Reuters poll showed on Monday.

Crude oil inventories are expected to have fallen by about 1.1 million barrels in the week to August 6, according to the average estimate of six analysts polled by Reuters.

Daily September WTI Crude Oil

Daily Swing Chart Technical Analysis

The main trend is down according to the daily swing chart. A trade through $65.01 will reaffirm the downtrend. A move through $74.23 will change the main trend to up.

The minor trend is also down. A trade through $70.18 will change the minor trend to up and shift momentum to the upside.

The major support area is $66.35 to $64.05. This zone is controlling the near-term direction of the market. It stopped the selling at $65.15 on Monday and at $65.01 on July 20.

The minor range is $70.18 to $65.15. The market is currently trading on the strong side of its 50% level at $67.67, making it new support.

The short-term range is $74.23 to $65.15. Its retracement zone at $69.69 to $70.76 is the next upside target. Since the main trend is down, sellers are likely to come in on a test of this area.

Daily Swing Chart Technical Forecast

Story continues

The direction of the September WTI crude oil market into the close is likely to be determined by trader reaction to $67.67.

Bullish Scenario

A sustained move over $67.67 will indicate the presence of buyers. If this move creates enough upside momentum then look for the rally to possibly extend into $69.69 to $70.76.

Look for sellers on the first test of $69.69 to $70.76. Taking out $70.76, however, could trigger an acceleration to the upside.

Bearish Scenario

A sustained move under $67.67 will signal the return of sellers. This could trigger another test of the retracement zone at $66.35 to $64.05 including the minor bottom at $65.15 and the main bottom at $65.01.

For a look at all of today’s economic events, check out our economic calendar.

This article was originally posted on FX Empire

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