Gold bulls gain ground amid weakening inflation data, strong technicals - DailyFX's Cottle
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(Kitco News) - Gold investors are starting to believe that the world’s monetary authorities may have won the battle against inflation, according to David Cottle, Market Analyst at DailyFX.
Cottle said markets are starting to look forward to interest rate cuts, perhaps as early as the first half of next year. “For all the yellow metal’s vaunted properties as an inflation hedge, it has suffered as borrowing costs have risen,” he wrote, with investors abandoning gold and other non-yielding assets for strong returns in the bond market.
“This explains at least partially why weaker inflation figures can do the trick of lifting both supposed haven assets like gold and traditionally riskier bets such as equities,” he said.
Cottle acknowledged that it’s possible the markets are getting ahead of themselves. “Despite its relative recent weakness, inflation remains well above central bank targets in much of the world,” he noted. “Moreover, those old enough to remember the inflationary days [of the] 1970s will also be well aware that inflation can be very difficult to kill once it’s entrenched and may not fade away in quite the linear fashion markets now seem to expect.”
The Eurozone’s final core CPI is set to be released on Friday, Cottle noted, with markets expecting to see some easing to 4.2% from 4.5%. “It’s safe to assume the gold market will like an as-expected print,” he said.
Gold prices have seen a strong three-day bounce up from $1,935 per ounce. “This level probably not coincidentally aligns with the 200-day moving average,” he said.
“It’s as well for the bulls that that level held, as the chart above shows that a move below it would have put the previously dominant downtrend channel uncomfortably close to the market,” Cottle wrote. However, he noted that the downtrend channel remains comfortably far below, at the $1883.70 level, which is now providing support.
“For now, the $1935 region remains as a likely near-term prop, with the psychologically important $2000 resistance mark in the bulls’ immediate sights,” he said.
The Relative Strength Indicator crossed above the 50-point barrier in the previous session and remains above it, he said, “But there’s clearly no sign of overbuying at this point, suggesting that the rally could have enough strength to get back to $2000 and, possibly up to late October’s peak of $2009.”
Cottle added that the Nov. 3 daily close just above $1993 is likely the next key resistance level for the precious metal.
IG’s own sentiment data shows that the majority of traders are still bullish even after today’s price gains, with 62% net long. Spot gold last traded at $1,982.67, up 1.17% on the session.