Gold trading outlook: futures drop a second day as dollar recovers

Gold fell in early European trading on Tuesday to hold below a recently touched 7-week high as equity markets and the US dollar recovered following Mondays major sell-off.

Comex gold for delivery in December traded 0.42% lower at $1 148.7 per troy ounce at 06:46 GMT, shifting in a daily range of $1 156.3 – $1 145.3. The contract slid 0.5% on Monday to $1 153.6 an ounce, having earlier risen to $1 169.8, the highest since July 7th.

Gold was one of the least pummeled assets in the commodities and stock markets on Monday when disappointment over Beijings lack of policy support over the weekend fueled fears of a continued economic slowdown, resulting in a near 9% drop in Chinese shares that led a global rout. The precious metal drew solid support as many investors used it as a store of value at times of uncertainty, helping it hover near the highest since early-July.

Fears of a slowing Chinese economy were reinforced last week after a private report showed a further drop in manufacturing activity, with the preliminary manufacturing Purchasing Managers’ Index sliding to a 77-month low of 47.1 in August, worse than a projected drop to 47.7 from 47.8 in July, as both domestic and export demand decreased at a faster pace.

Gold has rebounded 6.7% from a 5-1/2-year low in late July, but its upside remains limited by the Federal Reserves course of action. The recent yuan devaluation and uncertainty over global economic growth will likely impact the Feds policy decisions in the near-term, analysts say, with the probability of an interest rate hike in September continuing to decline, according to polls. Still, the US central bank is broadly expected to boost borrowing costs this year, although any hike will likely be minimal.

A report last week showed that US consumer inflation continues to trail the Feds targeted level, overshadowing recent robust housing and employment data. However, Atlanta Fed President Dennis Lockhart said interest rates will likely receive a boost “sometime this year,” even as plummeting oil prices cloud the inflation outlook. Two weeks ago, Mr. Lockhart said he was “very disposed” to a rate hike in September.

US economic data today will likely show an improvement in consumer confidence and in services activity growth in August, as well as a pick-up in Julys sales of new homes.

The US dollar index for settlement in September traded 0.32% higher at 93.655 at 06:46 GMT, shifting in a daily range of 93.930 – 93.500. The contract tumbled 1.7% on Monday to 93.356, having earlier fallen to 92.520, the lowest since January.

Reflecting increased safe haven demand, assets in the SPDR Gold Trust, the biggest bullion-backed ETF, rose for a third day on Monday, adding 3.27 tons for a total 681.1 tons, further rebounding from a recent 7-year low. Still, holdings in the fund have shrunk by nearly 50% since peaking at at 1353.35 tons in December 2012.

Pivot points

According to Binary Tribune’s daily analysis, December gold’s central pivot point on the Comex stands at $1 156.2. If the contract breaks its first resistance level at $1 167.2, next barrier will be at $1 180.9. In case the second key resistance is broken, the precious metal may attempt to advance to $1 191.9.

If the contract manages to breach the S1 level at $1 142.5, it will next see support at $1 131.5. With this second key support broken, movement to the downside may extend to $1 117.8.

In weekly terms, the central pivot point is at $1 145.3. The three key resistance levels are as follows: R1 – $1 182.2, R2 – $1 204.7, R3 – $1 241.6. The three key support levels are: S1 – $1 122.8, S2 – $1 085.9, S3 – $1 063.4.