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September 26, 2016 | 11:27 | Dubai
Gold has increasingly gone stale over the three months following the Brexit vote. Investors have stepped to the sidelines while waiting for a deeper correction or an event that could bring the market back to life and help mount a fresh challenge at the key resistance level of $1,375/oz, Ole Hansen, Head of Commodity Strategy at Saxo Bank has said. So far, such an event has failed to materialise and gold has traded back to $1,335/oz, this being the average price during the past three months. “Gold has traded between two converging trend lines since June 24 with its support at $1,310/oz and resistance at $1,347/oz. We maintain a positive medium-term outlook for gold, but a deeper correction and test below $1,300/oz may be needed in order to attract increased demand from long-term investors through exchange-traded products,” he said.
Likewise, a break above $1,375/oz could trigger an extension towards $1,485/oz as it would signal that the downtrend in place since 2011 has finally been broken, Hansen said.
Overall, commodities showed broad-based gains during last week that was driven by central bank action or perhaps (as it turned out) no action at all. The “hawkish no hike” from the Federal Open Market Committee helped trigger a strong recovery in riskier assets as the dollar weakened once again, said Hansen. The Bloomberg Commodity index recorded its best week in five with metals both precious and industrial rallying strongly. Despite a renewed surge in supply, oil markets bought into the idea that Opec and Russia may reach an agreement in Algiers on September 28. Silver surged while gold looked in no hurry to break out of its three-month range. Dwindling supply sent sugar and coffee surging (before running into profit-taking) while key crops such as corn and wheat struggled as the US harvest season kicked off. Worries about dwindling supplies have supported strong surges in both sugar and coffee. Raw sugar futures reached a four-year high and Arabica coffee a 19-month high before turning lower as the Brazilian real fell back and hedge funds holding very elevated net-long positions booked some profit.
Sugar has surged by 40% this year while Arabica Coffee is up by 14% after having traded sideways for the best part of two years, Hansen said in a weekly report, adding that during the past couple of months, both corn and wheat have made several attempts to recover from multi-year lows. A weaker dollar helped support a renewed attempt this week, but pressure from the US harvest and receding weather worries sapped strength from the market.
The FOMC opted to stay on hold for longer with the market now delaying its rate hike expectations until December – if it still expects one at all. Precious metals bounced on the news, but the failure to break higher despite the tailwinds from a weaker dollar and lower bond yields shows the current struggle to re-ignite the rally.