On Friday gold fell back in the immediate aftermath of the strong US payrolls report, which boosted the appetite for equities and the dollar. Prior to the jobs report, the price of gold had stabilized around $1200 per troy ounce following Monday’s sharp recovery. It was thus holding above the high of not just last week but the last month, too. In other words, precious metals traders had completely gotten over the disappointment from the “No” vote in Switzerland’s “Save Our Swiss Gold” proposal. Gold has more than recovered from that disappointment and even the stronger jobs report has so far not caused a major reaction, at least relative to Monday’s price swing. Indeed, at the time of this writing gold was still displaying a large bullish outside candle on the weekly chart, as evidenced by the first chart below. Should the weekly candle also close this way then it would suggest further gains could follow next week.
Friday aside, the dollar has not had as much impact on gold’s direction as it did previously, for the dollar index has continued in its upward trajectory this week. Therefore, it will be very interesting to see how the yellow metal will do relative to the dollar’s performance next week. If the greenback continues in its upward trajectory, but gold fails to head in the opposite direction, then one could conclude that the two assets have decoupled for now. So, there is a chance that investors are finally starting to treat gold as an independent asset, not a USD-denominated FX pair.
All that said however let’s not forget that it is not unheard of for the two assets to decouple in the short term only for the strong negative correlation to resume again at some point down the line. What’s more, there was actually a good reason for gold to have climbed higher earlier this week, and for once this was driven by news from the physical market: in a surprise move last Friday, India lifted some of the gold import restrictions. The so-called 80:20 rule, requiring importers to sell 20% of their shipments to jewelers for re-export, was abolished with immediate effect. Although the 10% import tax is still there, the removal of the 80:20 rule should help to shore up the physical demand in the former top gold consumer nation. The main wedding season in India is now underway and will last until about late January – just before the temperatures start rising towards uncomfortably hot levels. During this time, it is reasonable to expect large amounts of jewelry purchases by the Indians.
Given that gold has shown relative strength around the $1180 to $1200 area for the best part of two years now, many physical buyers may be or are thinking about increasing their holdings. If the physical demand rises now, prices could stage at least a moderate recovery regardless of what the dollar does. But the long-term trend is still technically bearish, so the vast majority of the market may still be positioned short. However if gold breaks above a long-term bearish trend and resistance around $1240 then we could see the unwinding of those positions which could thus lead to further strength in the medium term. Meanwhile in the more near-term outlook on the daily chart above, gold is also holding below a separate bearish trend line which comes in around $1215. The 61.8% Fibonacci level ($1208) of the last downswing and the 50-day SMA ($1202) also converge around this $1200/15 region, making it a sticky area of resistance. Thus a break above $1215 could potentially be a significant bullish development in the short term.