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TDS: Gold May Need More Equity Weakness To Sustain Rally

Kitco News

(Kitco News) - Gold may need further weakness in the equity market to retain its October rally, says TD Securities.

The metal spent much of the summer “in the gutter” as bearish traders piled on short positions, the firm pointed out a research note late Monday. However, a sharp correction lower in equities this month convinced many of these shorts to buy in order to cover, or exit, positions.

“This round of short covering did well to lift the yellow metal off the lows, and even to as high as $1,243.48/oz last week, but we are wary of the staying power this latest uptick, especially as the U.S. dollar continues to grind higher,” TDS said.

Gold may remain around recent highs if sentiment in the equity market “remains on edge,” TDS said. In particular, this could happen if U.S.-China trade rhetoric heats up again.

“With that said, TD Securities short/medium term outlook on gold is slightly bearish, as without equity weakness propping up the shiny metal up, we see little reason for the yellow metal to remain north of $1230/oz,” TDS said. “The equity meltdown has provided a much-needed distraction from a resurgent U.S. dollar, but if the equity fears dissipate, there is little that can prevent the precious metal market focus from shifting back to the performance of the greenback.”

The dollar index is acting as if it wants to test its highs for the year, and China’s currency remains under pressure. With the Fed remaining hawkish, relative to other central banks, gold could easily revert back to $1,200 an ounce again, TDS said. As of 10:20 a.m. EDT Tuesday, spot metal was down $3.80 for the day to $1,224.80 an ounce.

“Indeed, key technical support and CTA [Commodity Trading Adviser] selling triggers stand in the $1220-1215/oz region, and breaks of these levels could swiftly bring prices back to $1200/oz,” TDS said.

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