Gold bulls appear to be taking advantage of another dip towards $4,000, with signs of renewed buying emerging across major currencies. Yet with the US dollar remaining strong and elevated oil prices fuelling hawkish Fed expectations, the potential for a sustained rebound could depend on tonight's interest rate decision.
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Gold Bulls Return to $4,000 Support Ahead of the Fed
Back in September, I outlined my case that bulls may have been quietly accumulating above 4,000. A burst of bearish momentum last Thursday has clearly tested this hypothesis, although the original idea did allow for such a move – even if it was less preferable. Ultimately, 4,000 could be a big enough level to provide meaningful support over the near term, having already done a very good job in June and July. And there are already some encouraging signs, with gold rebounding against all FX majors over the past two sessions, not just the US dollar. The question now is whether it can deliver a decent enough bounce given the strength of the US dollar and elevated oil prices.
Crude Oil Has Taken the Shine from Gold
Higher oil prices have complicated matters for gold, as concerns over persistent energy-driven inflation have fuelled expectations of further Fed tightening. This has pushed US Treasury yields and the dollar higher, increasing the opportunity cost of holding non-yielding gold. And despite the ongoing geopolitical uncertainty that would typically support safe-haven demand, monetary policy expectations appear to be the dominant driver for now.
Speculative positioning has also contributed to the decline, with COT data showing large speculators reduced their net-long exposure for a sixth consecutive week through 20 October. Yet with gold having already suffered a sizeable correction, I suspect the 4,000 level could attract buyers, particularly if US yields and the dollar begin to lose momentum. The upcoming Fed meeting could prove pivotal in that regard, as a less hawkish hold than expected could provide some relief for gold bulls. However, a sufficiently hawkish message could see bears test the resolve of buyers around this major psychological level.
Source: CME, COMEX, CFTC (COT), LSEG
Gold Futures Technical Analysis: Bulls Defend $4,000
The daily chart shows that gold’s decline stalled almost perfectly at 4,000 – a level bears failed to hold prices beneath just a few months ago. Bullish range expansion on Tuesday took gold prices back above the monthly S1 pivot point, after printing two small candles below the lower two-standard-deviation band of the monthly VWAP. With mean reversion underway, perhaps gold bulls are seeking a move towards the monthly VWAP at 4,141.
Note the rising cumulative volume delta (CVD) on the 1-hour chart, suggesting buyers are regaining control over the near term. While the current 1-hour candle is hinting at a pullback, I suspect bulls could seek to capitalise on such dips, given that 4,000 has once again done a good job as support.
Source: ICE, TradingView
