Gold prices remained rather flat over Thursday and Friday’s Asian session as the USD seemed to stabilize ahead of the G20 summit in Buenos Aires.
At the summit, US president Trump and Chinese president Xi are expected to meet and discuss the tensions of the US-Sino trade relationships.
Analysts seem to have low expectations on a possible deal and should there not be a positive outcome we could see trade tensions between the two economies escalating.
The US president seems ready to slap another round of tariffs on Chinese imports, this time by raising existing tariffs from 10% to 25% on a range of Chinese products.
In any case should the two leaders not agree, we could see the USD strengthening in its role as a safe haven and possibly gold prices could drop.
Last week the dependence of gold prices on USD, was quite evident from the bullions price action.
Gold prices were relatively stable, moving in a sideways manner, with two exceptions.
The first was on the 27th, when gold prices had a marked drop at the same time roughly when USD was strengthening.
The fundamentals behind the strengthening of the USD included some hawkish comments by Fed officials as well as escalation of trade tensions.
The second was the next day, the 28th of November, when the USD reversed gains made, as Fed’s Chairman Powell had some dovish comments included in a speech about the Fed’s future rate hike path.
Stock markets breathed in relief, the USD weakened against a number of its counterparts and Gold prices regained any losses made the previous day.
Moving on to golds inner fundamentals, two issues seem to stand out, of the headlines reeling in.
The first is related to the supply side of gold.
As it seems, LBMA’s new guidelines about safe mining of the precious metal could provide a hit to the supply chain of gold.
The new guidelines seem to be too costly to implement for a number of smaller miners (artisanal miners) and may result in their product being characterized as “Blood Gold” and ending up in the black market.
The issue seems to be more intense in Zimbabwe as a substantial amount of gold production is dependent on such small miners.
The second issue, is related to the demand side as Turkish gold bullion imports fell to one of the lowest levels in over two years.
We suspect that the rise in gold prices, marked in October could have triggered a retreat in the demand for gold, while at the same time could also have instigated a selling of the precious metal by former buyers aiming at booking of profits.
Also, the strengthening of the TRY could have eased fears of previous months for the Turkish economy, weakening the risk averse sentiment in the Turkish market.
Finally, despite everybody focusing on the short term prospects regarding gold prices, we would like to provide a slightly deeper insight.
Although it might sound a bit premature, we would like to note that we currently see the case for gold prices to strengthen in 2019.
Should we accept that the USD’s direction plays a considerable role in the bullions price action, we could see a reversal pattern.
As the US economy is expected to slow down by a number of analysts and the USD has already priced in the possibility of the 2019 rate hikes, we could witness the greenback weakening with positive side-effects on gold’s prices.
Goldman Sacks had a similar conclusion, albeit from a slightly different approach as its analysts had mentioned that should the US growth slow down next year, as expected, gold could benefit from higher demand for defensive assets.
Goldman Sacks also mentions the possibility of there being additional support from central bank buying.
Whatever the case, such a scenario remains to be proven by time and the market.
Gold has been in a sideways movement and while the drop on the 27th of the month raised some eyebrows, the rally on the 28th of November raised gold prices to prior levels.
We see the case for the market to be in a “wait and see position” especially as the G20 Summit is on and a number of issues are still pending and could have an effect on the bullion’s price movements.
Currently, gold prices seem to be range bound between the 1220.00 (S1) support line and the 1230.00 (R1) resistance level.
We could see the precious metal continue to move in a sideways manner however a number of events could influence gold’s direction.
For our view to alter, we would require a clear breaking of either the prementioned support or resistance level.
Should the bulls take over gold’s direction, we could see it breaking the 1230.00 (R1) resistance line and aim if not break the 1239.50 (R2) resistance level and should even that be broken we could see the bullion advancing towards the 1252.15 (R3) resistance area.
If on the other hand the bears dictate gold’s direction, we could see it breaking the 1220.00 (S1) support line and aim (as on Wednesday the 27th of November) the 1210.00 support level.
Should that support level be broken we expect the bullion to target the 1196.50 (S3) support zone.