Gold approaches a watershed

Expectations of interest rate rises are growing, with 10-year Treasury yields advancing towards 2.0 percent after breaking out above 1.60.

The Chinese Yuan is easing against the US Dollar, in a managed process from the PBOC which will use up foreign reserves more slowly than a direct peg. It is also likely to minimize selling pressure on the Yuan, both from capital flight and from Chinese borrowers covering on Dollar-denominated loans.

Spot gold is easing, in a falling wedge formation, towards a test of medium-term support at $1300/ounce. This is a watershed moment. Breach of $1300 would warn of a test of primary support at $1200. But respect of support would suggest another test of the July high at $1375.

* Target calculation: 1375 + ( 1375 – 1300 ) = 1450

Rising interest rates and low inflation increase downward pressure on gold but uncertainty over US elections, Europe/Brexit, and the path of the Chinese economy contribute to buying support. Gold stocks serve as a useful counter-balance to growth stocks in a portfolio. If there are positive outcomes and a return to economic stability, then growth stocks will do well and gold is likely to underperform. If things goes wrong and growth stocks do poorly, gold stocks are likely to outperform.

In Australia the All Ordinaries Gold Index ($XGD) continues to test support at 4500. Respect (recovery above 5000) would signal another test of the recent highs at 5600. A weakening Australian Dollar/US Dollar would tend to mitigate the impact of a fed rate hike. Breach of 4500 is less likely but would confirm a primary down-trend.

* Target calculation: 4500 – ( 5000 – 4500 ) = 4000