Gold: Rally capped by rate risks – TD Securities

TD Securities’ Bart Melek notes that Gold has rebounded on dip buying and short covering after key technical support held, with prices near $4,150/oz. He highlights that Middle East tensions and central bank reserve diversification are supporting the metal, but warns that rising Oil prices, higher Fed hike probabilities and stronger yields should limit upside and keep resistance around $4,200/oz intact.

Dip buying meets rate headwinds

"Gold jumped 3.5% from Tuesday's lows to trade at around $4,150/oz at the time of writing. This rally does not seem to be an aggressive extension of long positions, but is rather driven by short covering and dip buying, after technical supports held during the preceding selloff."

"Gold rallied on dip-buying as key technical support held amid Middle East tensions, with traders increasingly discounting the risk that higher energy prices will prompt the Fed to raise rates this year. Surprisingly, this was occurring as the market was pricing a higher probability of a Fed hike in September."

"There are no fundamental reasons to think that the U.S. rate and FX environment will be conducive to increasing long gold exposure any time soon. Indeed, it is likely that the Middle East war-driven oil price increases will continue to increase the probability of a Fed rate hike."

"This will likely make it hard for price to break through $4,200/oz resistance. In fact, the higher rate environment suggests that the yellow metal may again be destined to drop back to support at around $3,900/oz, before any new highs occur some twelve months from now."