Talking Points:

  • Gold opened this week with the second biggest one-day drop - after July 3 - of 2017, and in turn confirmed a trendline
  • Medium-term momentum is still bullish but it is likely the fundamental considerations that decide breakout or reversal
  • While the metal plays the role of safe haven, the more critical driver is as an alternative to traditional 'fiat' currencies

Retail Gold traders are still net long the precious metal as it signals at least temporary resistance around 1,355. Yet, with only 64 percent of those with trades on long, conviction is near the lowest we've seen in months. See the current speculative standing on the metal at the DailyFX Sentiment page.

Gold posted its biggest drop in over two months - the second largest single-day slide of the year - to open this month. In turn, a tentative trendline resistance was given legitimacy for which the technical bears can start to make a case. Yet, traders should not rely on this nascent performance nor just technicals when evaluating their trade opportunities. This market's motivations run significantly deeper than a mere chart assessment and beyond the traditional role associations as a safe haven or inflation hedge. When faced with the temptation of a fresh technical rejection against the long-term ambitions of return to a perfect fundamental storm that bulls in 2008 to 2011 fondly look back on, we must remember that the assessment is always one of probabilities.

Establishing the potential in whether gold will break 1,360 or 1,320 next, we need to consider all the relevant analytical angles. Technicals are just the first line of the assessment. If we were to give weight to just this week's developments, it would seem a bearish reversal is imminent given the intensity of Monday's drop and the establishment of a four-year trendline resistance (which began back in August of 2013). Yet, the momentum of the past two months - approximately 12 percent trough to peak - significantly changes the picture. A mere pullback on a freshly confirmed trendline doesn't do much to shift the scales from the bulls. Yet, where the true ambitions rest in the market are for a return to the incredible advance experienced nearly a decade ago. And in those appetites we have to depend more heavily on fundamentals.

Recently, there has been a strong motivation for gold's advance in a particular fundamental lever: the Dollar's tumble. This is the primary pricing instrument for the commodity, but it also carries a more systemic status as the benchmark for traditional (also referred to as 'fiat') currency. Accounting for approximately two-third of all reserves, the Greenback stands as the principal counterpart to gold's role as an alternative to fiat. With the DXY Dollar Index diving through 2017, there is a material lift found for gold. Yet, this may be stretched for a number of reasons. The Dollar itself has realized a substantial reduction in its excess premium despite not actually losing tangible ground on monetary policy progress. What's more, this is not a two horse race. If the Euro, Pound, Yen and/or other primary liquid counterparts can readily absorb the capital outflows from the Dollar, there isn't a need for an alternative to FX at all. While that may not cap gold, it will seriously limit its capacity to climb. But, should the Dollar start to regain traction from other currencies, it can impact the commodity. Should it revert to its status as a safe haven, it can subsequently override the metal's own value in that capacity. Where gold heads from here will depend heavily on the Dollar's next move, and we focus on the commodity in today's Quick Takes video.

Gold Tentative Reversal at a Technical and Fundamental CrossroadsGold Tentative Reversal at a Technical and Fundamental Crossroads

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