Interest in precious metals remains high but a correction is on the cards

Precious metals continued to build on their impressive performance last month. Since my last column, gold for immediate delivery hit a high of $2,075 (Dh7,621) a troy ounce while silver peaked at $29.84. As of yesterday, gold and silver had achieved corrections of 3.4 per cent and 5.4 per cent, respectively, since those early August highs.

Interest in precious metals remains high but a recent slight decrease in the Commodities Futures Trading Commission’s weekly report on traders’ commitments would suggest that the rate at which the markets are building long positions since midJune has begun to slow.

Fundamentally, nothing has changed for precious metals. The greenback’s continued struggles have kept metals well bought in the interim. But a look at the relative strength index would suggest that metals are gearing up for a correction in the short term.

Typically, an RSI of 70 or above would suggest the asset is overbought while a reading of 30 or below suggests an asset is under-bought.

In the first weeks of August, gold hit an RSI high of 87. This would suggest that moves to build gold positions at current levels could prove too risky. I expect gold for immediate delivery to hold above $2,000. While it would take a lot to break through this key psychological level, a breach would expose a sharper, more aggressive correction towards the $1,885 level. However, $2,070 still remains the positive resistance in the short term.

The US Dollar Index was above 93.50 yesterday after it hit a low of 92.50 during the month. I am pausing my dollar bias in the interim. While the index has achieved a correction of more than 4 per cent since July began, there are many factors that will decide the medium-term movement of the dollar.

Democrats and Republicans are still debating a second coronavirus package after reaching an impasse and missing the deadline at the end of last week. While Democrats have backed a $3.5 trillion (Dh12.9tn) package, Republicans want a package of about $1tn.

A swift resolution could result in increased interest in the US dollar and other asset classes. Apart from these political developments, I am also keeping an eye out for some crucial US data points that will give more insight into how the American economy is dealing with the fallout from the Covid-19 pandemic.

US inflation data, which was due later yesterday, was expected to show that core prices increased 0.2 per cent month on month and rose 1.1 per cent on an annual basis.

I await US industrial production figures, which will be released on Friday and are expected to show an increase of 3 per cent month on month, and US manufacturing data that is due on August 21.

Across the pond, the euro-dollar pairing fell short of my $1.20 target, capping out at $1.1915. Since then, the common currency had retraced its steps to below $1.1750 at the time of writing. The move could pick up pace if the common currency closes below $1.17 in the short term.

However, any downsides below $1.1650 are unlikely, with the dollar trend still unclear. The pound-dollar pairing continues its consolidation above $1.30 and I expect to see another run towards $1.32 next month.

To round up, this month’s important economic data points include China’s release of its industrial production figures on Friday, while German and euro-area manufacturing PMI data is expected on August 21.