The outlook for gold next week is neutral with the precious metal (XAUUSD) expected to remain rangebound as markets swing gently from risk-on to risk-off. There are a number of conflicting forces are in-play currently with no single driver gaining the upper hand.
The US dollar has been weakening over the last 3 weeks, off its highest level since May 2017, as traders’ price in further interest rate cuts in 2019 with a 0.25% cut nearly fully priced in for this month. A weaker US dollar is normally a positive driver for gold fundamentals, but this has not been the case for the last few weeks with the inverse-correlation between the two asset classes seemingly broken for now. A weaker USD makes gold cheaper to buy for investors.
US-China trade talks continue with US officials saying that both sides are working on ‘phase one’ of a trade deal text with President Trump and Chinese President Xi Jinping expected to meet next month to hopefully sign off on the deal. Any cessation of the 15-month old US-China trade war would be met by a boost to riskier assets, to the detriment of gold any other safe-haven asset classes.
The long-running Brexit saga may well be coming to a close this weekend with the UK parliament voting on whether to ratify a newly agreed deal between the UK and the EU. The vote is expected to be very close and if UK PM Johnson is successful in getting the bill passed, riskier assets will again get an uplift. If the deal is not agreed, it is likely that the UK will have to seek an extension to the October 31 Brexit date, adding risk back into the market.
The recent state of uncertainty in risk markets is showing in the price of gold with the precious metal stuck in a symmetrical triangle or pennant inside a descending channel and nearing a breakout. While this formation normally precedes a break higher, the 20- and 50-day moving averages are acting as short-term resistance and cloud the outcome.
This confluence of uptrend and downtrend is usually seen as a continuation formation. That means that the market should resume its previous motion once the pattern plays out. In this instance, however, it’s quite hard to see a clear trade signal right before the pennant began to take shape. At the margin, however, it looks as though the gold price looks set for more gains after this a-b-c correction.
Gold prices edged higher amid ebbing optimism about a Brexit breakthrough. That cooled risk appetite and nudged yields lower, bolstering the appeal of non-interest-bearing alternatives. Skepticism about would-be signs of progress in US-China trade negotiations likewise soured sentiment.
GOLD PRICES MAY STRUGGLE TO CAPITALIZE ON GLOBAL GROWTH FEARS
Looking ahead, headline flow shaping bets on whether a Brexit deal can be done before Thursday’s EU leaders’ summit will compete for attention with broader guidance on the ongoing global slowdown. The IMF and the World Bank are set to start their annual meeting and publish updated forecasts. A downbeat take is likely after leading PMI data showed output growth matched a three-year low last month.
Third-quarter corporate earnings reports from JPMorgan, Goldman Sachs and Citigroup may likewise jump into the spotlight. The top lenders have a front-row seat on US financial conditions, which have been tightening since early May despite the Fed’s various easing efforts (rate cuts, repo interventions, asset purchases). They may reiterate that this speaks to acute worries about where the economy is heading.
Gold prices are still trying to confirm a choppy Head and Shoulders top after breaking five-month rising trend support. A daily close back below the 1480-84.63 zone targets the 1439.14-46.94 area thereafter. Initial resistance remains in the 1520.34-35.03 zone.
While all of this might push prevailing sentiment into risk-off territory again as the day wears on, it is unclear that gold prices have the wherewithal to capitalize. There seems limited scope to price in a much more dovish Fed outlook than is already assumed by investors while a swelling premium on liquidity could boost the US Dollar the metal’s expense.
The XAUUSD refers to the price of 1 troy ounce of gold in terms of the US dollar. Over the years, gold has remained an attractive commodity due to its store value, beautiful appearance, and malleability. Many investors consider gold as a safe haven instrument that buffers them against inflation in times of recession and financial crisis. This is due to its ability to increase its value in times of volatility and economic uncertainty.
Trading gold in the foreign exchange market or forex market is a great way for investors world over to diversify their portfolio through the use of futures contracts and derivatives. Traders seeking to trade spot gold need to gain a good understanding of some of the factors that have an impact on the XAUUSD pair, including the supply and demand, US dollar risk, current events, and market speculations. The most common benchmark for pricing the majority of gold products and derivatives has been the London Gold Fixing.
In this section, some simple examples will be given in order for traders to understand how a trade works and how to calculate profits and losses manually. The MetaTrader 5 trading software which is used at AM Broker includes a full back office function that makes it easy for the trader to appreciate the value of open positions as well as the profit and loss of closed trades.
XAU/USD (Spot Gold vs. US Dollar
When talking about precious metals the same principle applies as to the Forex market trading. The base instrument is the reference that defines the contract size. The profit and loss calculation, however, is always on the secondary instrument, which in the following cases is the US Dollar:
In order to buy or sell 1 contract (standard lot) of Spot Gold clients require a minimum of 800 USD in their account. When this is the case no maintenance margin will be applied to standard accounts. AM Broker offers monitoring the stop out level in real-time and the platform automatically closes all positions at 30% stop out level (Equity/Margin). AM Broker offers negative balance protection which means in an event where the account's equity becomes negative due to the stop out, the company will not demand for the debit balance, thus guaranteeing your risk is limited.
Buy 5 XAUUSD at 1750.30 | Sell 5 XAUUSD at 1758.80
Buy 5 XAUUSD at 1652.5 | Sell 5 XAUUSD at 1646.7
There are no set rules in the capital markets. For example, normally we expect gold prices to move inverse to the dollar and to be correlated with currencies like the Australian dollar. There are a lot of trading strategies built around these “normal” relationships. However, that is not what is happening to gold right now. What is wrong and what can traders do about it?
There are many factors that affect the supply and demand for gold. It is a shelter against inflation and will typically rise in prices when the USD is inflating or falling in value compared to other major currencies. Like most commodities, it can also rise in price during economic expansions and will often decline during contractions with other commodity prices.
However, gold is also a hedge against uncertainty. It is what is often called a “store of value.” Assets that qualify as a store of value include a few commodities and some currencies, particularly the USD. Store of value assets will rise in value as demand picks up during economic crises. That is the situation the world is about to deal rather sooner than later.
Both the US dollar and gold are widely recognized and utilized “store of value” assets and as uncertainty increases in 2019, the value of the USD is likely to continue increasing in tandem with gold. This means that traditional analysis might be much more unreliable than expected.
The outlook created by the fundamental analysis of the gold market remains strong with the growing uncertainty in the world economy and rapidly expanding money supply. As governments try to cope with financial turbulence, they print more and more fiat money (money that is not backed with material assets). This fuels inflation that eats away government bonds yields. If the yields themselves are lower than the inflation, then you actually lose purchasing power by holding these bonds. In such a situation, investors switch to assets they believe will allow them to preserve their wealth. Gold is precisely one of such assets.
With the demand for gold growing both thanks to the demand for jewelry and thanks to the free exchange of information over the Internet, there is no technical possibility to satisfy the demand with both the existing and the anticipated gold supply. All of this suggests that gold is on its way up for the long term.