Commodities

Gold rebounds as dollar eases and equities retreat; trades in a triangle – Commodity News

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Bullion prices bounced higher on Wednesday, on the back of a pullback in the dollar and continued fragility in equity markets. The yellow metal is currently trading at a critical technical crossroads, with a break in either side of a symmetrical triangle needed to determine the near-term bias.

It’s no secret that most of gold’s troubles this year have been owed to the strength in the US dollar. With gold being priced in dollars, a stronger US currency renders the yellow metal more expensive for investors using foreign currencies, thereby curbing its demand – and vice versa. Considering that the dollar index is currently trading just below 17-month highs, gold prices have been struggling to gain traction overall in recent months, even as several risks loomed large, from trade tensions to weakness in stocks.

Focusing on a shorter timeframe, gold prices rebounded from 1-month lows on Wednesday, aided by a modest pullback in the dollar. The continued fragility in equity markets may have also contributed to the slight recovery, causing investors to assume a more defensive profile amid the selloff, and diverting funds back into haven assets such as gold.

The technical picture is particularly interesting, as the “barbarous relic” is trading within a symmetrical triangle formation, which keeps the bias neutral for now. A decisive break above the upper bound of this triangle would turn the outlook to bullish, as the price would also be trading above the 50- and 100-day moving averages, setting the stage for more advances – initially towards the $1238 zone. On the flipside, a clear close below the lower bound of this triangle and the $1200 handle would suggest the bears are back in charge, paving for the way for a test of the $1180 area at first.

As for what may trigger such a break, the most important determinant will probably be the performance of the dollar. The greenback has enjoyed strong gains in 2018, which can be tracked to three main factors: its relative safety given its reserve-currency status, interest rate differentials widening in the US’ favor, and notable weakness in the euro, sterling, and EM currencies amid local risks. While it could still rise a little further from current levels, it’s useful to note that “long-dollar” is becoming an increasingly crowded trade. This renders the US currency vulnerable to a meaningful downside correction in case any dollar-negative news hit the wires, as several speculators would rush to cover or unwind their previous long bets.

Of course, a lot will also depend on how global risk appetite evolves. Major stock indices like the S&P 500 have been under notable selling pressure in recent sessions as the earnings prospects of major firms including heavyweights like Apple have been reevaluated. Should equity investors remain on the defensive, that could eventually lead them to consider adding some gold to their portfolios as a means of hedging against the turmoil.

Additionally, how trade tensions between the world’s largest economies evolve could also prove instrumental. Namely, will Trump call a “trade ceasefire” with China upon completion of his meeting with Chinese President Xi Jinping later this month? Separately, will he impose tariffs on European autos as has been hinted lately?

Overall, the fundamental variables at play are numerous and subject to change drastically on a single headline, which provides all the more reason to watch technical breaks for changes in sentiment. In this sense, the direction that gold breaks its symmetrical triangle in, may be the clearest signal of where the near-term bias lies.