Gold tumbling, US October CPI rates next big test for Gold

Gold’s price tumbled yesterday, with the bearish sentiment for the precious metal’s price leading the way decisively. In today’s report we intend to have a look at the revival of the negative correlation of the USD with gold’s price, the effect of Donald Trump’s re-election as president of the US, the Fed’s interest rate decision and for a rounder view conclude the report with a technical analysis of gold’s daily chart.    

The negative correlation of the USD with Gold’s price intensifies

The negative correlation of the USD with gold’s price was highlighted over the past week. Characteristically, the two trading instruments ended each and every day of the past week in opposite directions. The intensification of the negative correlation of the two trading instruments seems to have begun since the first results of the US elections were publicized on Wednesday. We expect the negative correlation of the USD with gold’s price to continue in the coming week, yet its intensity may ease, as the fundamental and monetary events as well as the macroeconomic data to be released are to be of lower impact than the ones this week. Furthermore, we also note that the also the negative correlation of gold with US yields is in full swing, with US yields of both short term and long term bonds being on the rise. Thus the appeal of US Bonds as a safe haven instrument has been increased among market participants possibly shifting investments away from gold. At this point we would also like to note that we do not view the rally of Bitcoin’s price as indicative of a negative correlation of the cryptocurrency with gold on a fundamental basis.

Trump’s re-election weighed on Gold’s price

The US elections are over and in an impressive political comeback Donald Trump got clearly re-elected as the President of the US. Please note that Republicans also secured a majority in the Senate, while seem to be nearing also a slim majority in the House of Representatives, in which case they will be also controlling Congress. Furthermore, we may also characterise the majority of the US supreme court as conservatives. Practically Republicans may be controlling all three state powers, namely the administrative, legislative and judicial, at a nationwide, Federal level. This concentration of power to the Republicans may practically provide superpowers to elect President Trump in the next few years on a political level. Marketwise, the election of Trump as the next president of the US, supported the USD as it intensified market expectations for amore isolationist economic policy of the US Government in the near future as Trump in the recent past had highlighted his intentions to impose tariffs of imports from a number of countries. Thus the election of Trump indirectly weighed on the precious metal. Yet the unpredictability of the president-elect Trump’s character in the future may intensify market uncertainty thus leading towards some support for the precious metal’s price.        

The Fed’s rate cut and October’s US CPI rates   

Last Thursday, the Fed cut rates as expected yet may have been more hawkish than expected in its forward guidance. In its accompanying statement, the bank removed the line stating that “the Committee has gained greater confidence that inflation is moving sustainably toward 2 percent“. The removal may be interpreted as a signal that we may see renewed inflationary pressures, causing the bank to slow down its rate-cutting path. Yet Fed Chairman Powell seemed to dismiss such an assumption in his press conference. Furthermore, we highlight that the bank seems determined to defend its independence from the newly elected US President, as the Fed Chairman clearly stated that he would not resign if asked for by Donald Trump.  Despite a slight dose of hawkishness being included in the interest rate decision, the USD retreated thus allowing gold’s price to rise. Hence and given the perceived inflation-hedging nature of gold as an investment instrument, we highlight the release of the US October CPI rates next Wednesday, as the next big test for gold. The headline rate is expected to accelerate to 2.6%yoy if compared to September’s 2.4%yoy, while on a core level the rate is expected to remain unchanged at 3.3%yoy. Overall, should the rates show a relative resilience of inflationary pressures in the US economy, we may see market expectations easing for another rate cut by the Fed in December, in turn supporting the USD and weighing on gold’s price.          

Technical analysis

XAU/USD daily chart

• Support: 2475 (S1), 2350 (S2), 2275 (S3)

• Resistance: 2600 (R1), 2685 (R2), 2790 (R3)

Gold’s price despite some hesitation, dropped since our last week, clearly breaking the 2685 (R2) support line, and continued lower during today’s European session, breaking the 2600 (R1) support level. We maintain a bearish outlook for the precious metal’s price given the downward trendline guiding the precious metal’s price since the 31st of October. Furthermore the RSI indicator has broken below the reading of 50 and is currently aiming for the reading of 30, highlighting the build-up of a bearish sentiment for the shiny metal among market participants. On a small word of warning for gold bears, gold’s price action in its downward motion has broken also the lower Bollinger band, which may cause a correction higher for the precious metal’s price. Should the bears maintain control over gold’s price we set as the next possible target for the bears, the 2475 (S1) support line. The scenario of the bulls taking over seems currently remote and for a bullish outlook, we would require gold’s price to reverse direction, breaking the 2600 (R1) resistance line continue higher to break the prementioned downward trendline, in a first signal that the downward motion has been interrupted and continue to break the 2685 (R2) resistance base.