Near-Term Gains Appear Unlikely for Gold

Gold is resilient but risk sentiment is increasingly positive, the dollar is at important support, and there is some major resistance in play.

Gold Bar

The week is starting with pretty much all of the equity indices in Asia and Europe in the green. Even the ones that have been notably weak as of late.

Combine that with a dollar that is bouncing and some important overhead resistance, and it’s hard to envision a near-term bullish break for gold prices.

Broad-Based Strength in the Equity Markets

Equities have been strong as of late, there’s no secret there. I can’t imagine anyone following the markets being unaware that US equity indices broke to all-time highs last week.

But what might not be so commonly known is that the equity rally is not correlated across the global markets. Particularly, several Asian equity indices are lagging significantly. More surprisingly, the UK FTSE posted a small loss last week.

European market are generally strong, and strangely, the German DAX has been outperforming the S&P 500 since August. I say strangely because the German index has underperformed since 2015. Not only that, German data has been weak as of late, and the euro appreciated just over 2.5% last month.

But equities have been strong for several weeks now. What makes today different? Well, a broad-based rally in the global equity markets is an indication of strong risk appetite. When US traders get to their desk and see almost all of the global indices in the green, they are not very likely to hit that buy button on spot gold.

US Dollar Index (DXY) Testing Major Support

US Dollar Index (DXY) Weekly Chart

Another big driver for gold prices is the dollar. DXY has been held up by it’s 50-week moving average for three straight weeks now. It’s catching a nice bid in the early day and this is just one more reason why I think gold might struggle to extend its recent gains.

Overall in the bigger picture, the dollar does look weak. In this context, I think that rallies in the greenback are likely to be met with sellers over the next few days. DXY shed just over 2% in October and printed a bearish engulfing candle in the process. I have little reason to believe it is making a meaningful bottom from here.

Major Resistance in Play for Gold

Gold Daily Nov 4
Gold Daily Chart

Last week we saw gold hold above a fairly important support area near $1486. The turn from there led to a surge above a declining trendline that originates from the September high.

I think that most people are looking at the same thing here. There are a lot of eyes on the mentioned trendline. Whether looking at it as a trendline or drawing a down trend channel that encompasses the roughly two months of price action.

Besides that, the October range is being closely watched. Throughout October, gold fell under pressure every time it neared $1520. This is perhaps the most important thing that I’m considering over the near-term.

I do think that we break higher from here, perhaps in the next week or two. But the markets will need to be aligned for such a move. The positive risk sentiment and strong dollar are not creating such an environment at the moment.

For this reason, I think we might see gold prices pare a bit of their recent gains. Perhaps we see a retest of the broken declining trendline. I think a more likely scenario is that dips towards $1500 will get bought.