It remains to be seen whether the precious metal and the US benchmark index – which have been positively correlating for months – can now hold on in the positive territory.
Gold has turned green on the day after being red earlier when it fell to its lowest level since July. The S&P 500 likewise turned higher after it dropped to – yes you guessed it – its lowest level since July.
Gold’s recent sharp falls have undoubtedly shaken out a lot of weaker hands, and probably unnerved even some of the longer-term bulls who may have been discouraged by the fact it didn’t hold above its 2011 peak for too long. Likewise the S&P’s sharp sell-off has raised question marks over the sustainability of the long-term bull trend. But these are the sort of levels I would have expected gold and to a lesser degree the S&P to turn around from if long-term trend is still bullish for these markets.
There was no obvious trigger behind the rebound in gold prices. Yes, the dollar has eased off its best levels, but it has done so after gold had already hit a low for the session and bounced. But the fact that many central bank officials are telling us that interest rates will remain low for a long period of time, and more stimulus might be needed, is discouraging sellers to short the precious metal, especially after already falling more than 10% from its record high hit in the summer. Note also that the S&P is off by a similar percent from its record high.
A lot of investors who missed out on the big rally from March in these assets are now maybe thinking that getting gold 10% cheaper compared to the summer is appealing.
As mentioned, the common denominator behind both the S&P and gold’s rally is stimulus provided by central banks around the world, which continue to maintain expansionary monetary policy stances. This morning, for example, the world’s most boring central bank AKA the Swiss National Bank re-iterated this message. The SNB left its monetary policy unchanged yet again, with the central bank re-iterating that it was ready to accelerate its interventions in foreign currency markets to stem the upward pressure on the franc. Today we also heard a similar message from several Fed officials.
From a technical point of view, it is worth watching gold to see if it forms a bear trap below August low. IF so, then the sellers will be in trouble, potentially paving the way for a sharp short squeeze rally:
Source: ThinkMarkets and TradingView.com
Similarly, the S&P 500 has bounced off a pivotal level around 3214/5, which had provided strong support and resistance in the past. It would be bullish if the index breaks out of the falling wedge pattern in the days ahead:
Source: ThinkMarkets and TradingView.com