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Gold Technical: Bullish acceleration in progress reinforced by “Trump Trade”
This is a follow-up analysis of our prior report “Gold Technical: Poised for a potential bullish breakout as US CPI looms” published on 11 September 2024. Click here for a recap.
Since our last publication, the price actions of Gold (XAU/USD) have staged the bullish breakout and cleared above the US$2,640/715 medium-term resistance. The yellow metal has rallied by 9.6% from 11 September to Monday, 21 October current all-time high of US$2,740.
“Trump Trade” narrative has reinforced the uptrend in Gold
The “Trump Trade” narrative has gained traction in the recent week due to rising odds of Trump winning the US election based on data from betting markets (60%Trump versus 39% Harris based on Real Clear Politics data as of 20 October).
Given that Trump’s “generous” corporate tax cuts proposal to reduce the tax rate to 15% from 21% will likely widen the US federal deficit further, in turn leading the market to question the credit standing of the US government (such as the prospect of more frequent government shutdowns) that may see an erosion of confidence in US Treasuries and strengthened Gold (XAU/USD).
Gold is being used as tail-risk hedge
Fig 1: S&P 500 & S&P 500/Gold ratio long-term secular trends as of 22 Oct 2024 (Source: TradingView, click to enlarge chart)
Trump’s proposed tax and trade tariffs policies are likely to reignite upward inflationary pressures in the medium to long-term.
In addition, geopolitical risk premium has not been totally eradicated yet in the Middle East due to the ongoing Israel-Hamas war.
Hence, higher inflationary pressure and an increase in geopolitical risk premium are deadly concoctions that may lead to stagflation which in turn can spark a potential risk-off episode in the global financial markets.
In the lens of technical analysis, the ratio chart of S&P 500 over Gold (XAU/USD) together with its monthly RSI momentum indictor of the S&P 500 / Gold (XAU/USD) ratio has displayed a significant underperformance of S&P 500 against Gold (XAU/USD) since February 2024 (see Fig 1).
Similar observation has been detected in the past during the peak of the Dot.com bubble in August 2000 before the S&P 500 staged a major correction of 35% over the next two years.
Therefore, the recent heightened demand for Gold (XAU/USD) is likely reinforced by portfolio tail-risk hedging activities as well.
Medium-term uptrend remains intact
Fig 2: Gold (XAU/USD) medium-term & major trends as of 22 Oct 2024 (Source: TradingView, click to enlarge chart)
The price actions of Gold (XAU/USD) have been trading firmly above its rising 20-day and 50-day moving averages since 9 August 2024 supported by a parallel ascending trendline support seen in the daily RSI momentum indicator (see Fig 2).
These observations suggest that medium-term upside momentum remains intact for Gold (XAU/USD).
Watch the US$2,590 key medium-term pivotal support for the potential continuation of the impulsive up move sequence for the next medium-term resistances to come in at US$2,850/886 and US$2,933 (also the upper boundary of the medium-term ascending channel from 15 February 2024 low).
On the flipside, failure to hold at US$2,590 negates the bullish tone for a multi-week correction sequence to unfold within its major uptrend phase to expose the next medium-term supports at US$2,484 and US$2,360 (also the 200-day moving average).
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