Gold finally has the benefit of safe-haven demand.
Stock market weakness is pushing sentiment in the metal’s favor.
The dollar/gold ratio is also finally in favor of the gold bulls.
After months of investors embracing risk and ignoring gold, the yellow metal has finally returned to the investing spotlight. Last week’s stock market panic sparked some much-needed safety-related interest in gold and boosted prices for the first time in weeks. In today’s report I’ll make the case that gold still has the benefit of safe-haven demand thanks to continued weakness in the stock market. We’ll also review the supporting factors for an October turnaround in the metal.
Last week’s panic decline in global equities triggered the biggest rally in the gold price in months. Heightened fears over rising U.S. Treasury yields sparked a 5% slide in stock prices and sent investors scurrying for protection. This time around the U.S. dollar was ignored in favor of gold, thanks in part to a record short interest buildup which made it easier for the bulls to take control of gold’s immediate-term (1-4 week) trend. Gold broke out of a 6-week trading range and is now in a good technical position to build on its latest gains.
One of the biggest obstacles which prevented gold from rallying in recent weeks was the relentless strength in the U.S. dollar index (DXY). Gold’s currency component remained weakened as a consequence, and the metal was kept in a tight, narrow trading range as international investors flocked to the dollar as a hedge against emerging markets risk. That changed last week when the dollar index broke under its 15-day moving average and established a series of lower peaks (below), which suggests the dollar no longer enjoys strong immediate-term demand.