Gold has been boosted by the latest confirmation that the Federal Reserve remain accommodative for some time to come, whilst a correction to the risk recovery should also be supportive. There is an improved outlook within the medium term range once more. However, key resistance remains which needs to be overcome before a breakout is seen. We subsequently remain cautious of how far this near term move can go.
The continued message from central banks is that they are going to remain a backstop in the recovery from the massive economic shock of COVID-19. They will be so for a long time to come. This has two conflicting impacts on gold. Massively easy monetary policy keeps real yields low (or negative) and this should help to support gold. However, it also means a risk positive backdrop too, which is a drag on gold.
In recent days we have seen a sharp pullback on Treasury yields which has helped to pull gold higher. The strong negative correlation between the US 10 year Treasury yield and gold is holding. However, that move has begun to stabilise and we are also seeing gold just tailing off in its move higher.
It would suggest that unless yields break to new multi month lows below +0.55% then gold may well struggle to breakout (and if a breakout is seen, then it is unlikely to shoot higher).
At some stage, the moves on the dollar may also become more of a factor once more. For now, the correlation between the US dollar and gold have moved abnormally positive as the dollar has become more of a safe haven play. We do not expect this positive correlation to last and in the past few sessions this is beginning to show. Although near term dollar technical rallies are still likely, we are still looking for a broad dollar underperformance to be a feature of H2 2020. With the historic negative correlation with gold (12 month average still c. -0.22) will be gold supportive. This may help gold eventually pull higher from its range (even if, once more we do not expect that it will be an easy run higher).
Ultimately, we expect further upside in the longer term towards $1800 to be seen in due course, however the path to get there (the choppy near term outlook) could be tricky to navigate.
- $1720/$1725 – near term pivot band
- $1708 – 10th June low
- $1692 – 9th June low
- $1744 – 1st June high
- $1754 – 20th May high
- $1764 – multi-year high, key resistance 18th May high
Gold closed -$9 lower yesterday in a session where risk appetite was smashed and safe haven assets outperformed. This is not a great set up for gold bulls looking for a breakout of the medium term trading range.
Technically, there is a near term positive bias still within the range as the market is still eyeing a test of the $1744 June resistance, however we see the ranging configuration re-asserting once more. The RSI rolling over again for another lower high around the mid-50s, whilst MACD lines meekly edge higher does not bode especially well for this being the time where gold breaks higher. There is still a move that is holding on to the near term pivot band support $1720/$1725 (shown well on the hourly chart) this morning.
The hourly chart also shows a five day recovery also intact, whilst the hourly RSI holding above 40 will encourage the bulls. The question is whether this positive near term bias within the range can translate to a move that drives a breakout. Yesterday would have been an ideal day for such a move, but the bulls failed. Resistance at $1744/$1746 is the initial barrier, before $1753 and the key high at $1764. A failure back under $1720 today would once more neutralise the range.
STRATEGY: For now, we remain cautious of rallies within the $1660/$1764 range as the technicals point to the continuation of the medium term consolidation. However the fundamental backdrop remains gold positive for an eventual breakout. Closing above $1744 would help to improve the medium term outlook.