Wednesday, January 8, 2020

Gold looks likely to continue to trend upwards in the medium term

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Analysts’ Pick: Gold looks likely to continue to trend upwards in the medium-term

Gold rose to as high as 1611.42 on Wednesday morning, reaching its highest level since 2013 after Iran reportedly fired ballistic missiles on Iraq air bases housing US troops. But gold prices have been gaining since the end of 2019, as investors hedged against record highs in the US stock market after the US-China phase one trade agreement was announced to be signed on January 15th, and as the dollar started to weaken as investors pulled out of their positions thanks to lower risk of global economic slowdown.

Recent surge in gold prices likely due to record high US stock market levels and political tensions


As gold tends to be affected by the dollar as well, today's ADP employment change report will likely affect gold prices. Yesterday's ISM Non-Manufacturing PMI report showed employment in the services sector expanding at a slower rate in December. But coupled with slowing employment in the manufacturing sector, ADP employment change will likely grow but at a lower level than economists' forecast of 160,000. The dollar should weaken as a result, with the Dollar Index possibly reaching 96.56's level, boosting gold to higher levels.

December’s Non-Manufacturing PMI report shows employment and new orders expanding at a slower rate


But with the US-China phase one agreement set to be signed next week, demand for safe haven assets may fall slightly in the short-term although it is likely that the market has already priced this in. In the medium term, gold is likely to continue to rise, since it is still doubtful that the US-China phase one trade deal will solve the trade issues between the two superpowers. Post-Brexit UK also continues to be uncertain, as the timeframe in which British Prime Minister Boris Johnson has to negotiate a trade agreement with the EU is likely too short for a detailed deal. Political tensions between the US and Iran will also likely drive demand for gold in the short-to-medium-term.

Gold is likely to continue to range at current levels as a result, with a possible correction to 1577.69's level. But if tension between the US and Iran escalate further, then gold will likely surge past 1600.00, towards 1610.00's level. In the medium-term, expect gold to continue to rise, likely past 1620.00's level.

  Scenario Effect on gold prices in the short term
1 ADP employment miss expectations; US-Iran tensions do not escalate Rise slightly toward 1600.00
2 ADP employment meets expectations; US-Iran tensions do not escalate Remain little change
3 US-Iran tensions escalate Surge past 1600.00 towards 1610.00
*Source: ADSS

Technical Analysis:         


Bulls hold possession of gold, keeping prices above the 50-day, 100-day and 200-day moving average. Although a slight correction to gold prices occurred after Stochastics hit above 90 we may see another correction as some investors unwind their position ahead of the signing of the US-China phase one trade agreement. Markets will likely see this as a short-term alleviation of risk and capital should temporarily flow into riskier assets. But as global risk continues to grow, gold prices are likely to continue to advance in the medium term toward the seven-year high of 1696.20. The Ichimoku cloud confirms this, signalling an uptrend in the medium-term.

Support: 1577.69 / 1557.74 / 1540.00

Resistance: 1600.00 / 1610.00 / 1620.00

Gold Chart (H4)