Gold Falters at Resistance, Grappling With PCE, Month-End Flows and Jackson Hole

Gold has enjoyed a strong month, but momentum has started to falter after the rally stalled near resistance. Sticky US inflation and firm growth data supported the US dollar, while month-end flows and Kevin Warsh’s Jackson Hole speech add further near-term risk. Dip buyers may still be lurking below, but gold could face a deeper retracement before bulls attempt another push higher.

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Gold Falters Near Resistance After Sticky PCE

It has been a solid month for gold, which at Tuesday’s high was briefly on track for its best monthly performance since September 1999. But with the rally stalling around resistance and printing a small doji ahead of PCE inflation and Jackson Hole, a wobble or two into month-end was perhaps inevitable. That is what we saw on Wednesday following the sticky PCE inflation report.

Source: COMEX, TradingView

While PCE data landed mostly as expected, it did not deliver the softening some had hoped for, with core PCE at 3.3% y/y and still well above the Fed’s 2% target. The final estimate for Q2 GDP was revised higher to 3.6%, real consumer spending rose to 3.4% and company profits increased 8.2%.

These are hardly recessionary signals and provide little reason to expect any hint of dovishness from Kevin Warsh at his Jackson Hole speech on Friday. The US dollar was therefore the strongest FX major on Wednesday, to the detriment of gold, which leaves scope for a deeper near-term retracement.

Source: BEA, LSEG

Gold Dip Buyers May Still Lurk Below

Further out, I still suspect gold will benefit from a dip-buying mentality, particularly from traders frustrated at missing the first leg higher. Unless the gold market suffers a much deeper reversal, retracements may continue to be viewed as opportunities to re-enter in anticipation of an eventual break above 5,000.

Futures and Options Sentiment Remains Bullish

Sentiment across futures and options currently backs up that assumption. Net-long exposure continues to trend higher among large speculators and managed funds, while total open interest is rising alongside gold prices to suggest strong demand from futures participants.

The one-week 10-delta risk reversal is also positive, suggesting tail risk is skewed to the upside. Risk reversals more broadly point to greater demand for calls than puts among institutional participants.

That said, I am not yet convinced gold will simply push straight to a fresh high unless the wheels truly fall off the US dollar. We do not yet have the backdrop for that kind of USD selloff. Although I have outlined my longer-term bearish bias on the dollar using the multi-year charts, those themes can take months to play out.

If US data remains supportive of the dollar and keeps the Fed hawkish, a complete USD collapse still looks unlikely for now. In theory, that could stifle a break to new highs for gold over the near term.

Source: COMEX, CFTC (COT), LSEG

Gold Futures (GC) Technical Analysis

The daily chart shows the rally stalling around the 4,700 handle and 4,712.8 high-volume node (HVN), just beneath the May high. A small bearish engulfing candle also formed on Wednesday, leaving gold vulnerable to a pullback should Warsh lean too hawkish on Friday. Also note that the RSI (14) reached overbought territory on Tuesday, while a bearish divergence formed on the RSI (2) within its overbought zone.

While at least a minor pullback seems feasible, I am not convinced it will be particularly deep either. A move back towards 4,500 could be viewed as a gift by bulls.

But with another full day and a half before Warsh speaks, bulls may still put up a fight. Bears may look to fade moves towards the May high in anticipation of a pullback towards the 10- or 20-day EMAs, with the 4,500 handle and weekly VPOC at 4,458 potentially providing support if those averages break.

A move above the May high would bring the 4,918 April high and 5,000 handle into focus.

Source: ICE, TradingView

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-- Written by Matt Simpson

Follow Matt on Twitter @cLeverEdge

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