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A slip back should be another opportunity for the gold bulls

Trading outlook:
We still see a lack of real correlation on gold across traditional lines, and the technical outlook is still the main driver. Holding the breakout above a pivot at $1702 is increasingly key for the continued positive outlook and a test of the highs again.

Fundamentals/Newsflow

We have continued to see gold wavering in and out of correlation with its traditional links to US Treasury yields, the dollar and equities all being questioned.

A lack of correction with US Treasury yields is a big sign that gold is not trading as a safe haven asset right now. Versus the dollar, there has been a move in and out of its traditional negative correlation during April. Most recently, gold broke out whilst the dollar was also performing well. Furthermore, gold has just also latterly begun to lose its (abnormal) directional steer off the E-mini S&P futures. This would be expected as volatility begins to settle down in the coming weeks.

This would suggest that gold has to an extent decoupled from its correlations (although as can be seen in the relative performance graph, silver continues to trade like “gold on steroids”) and is trading along technicals.  

Below we can see moves on Treasury yields doing little to guide gold.

The dollar and gold have moved higher in recent days, although today this is not the case.

As equities have fallen over, gold has remained strong. This will begin to weigh on the calculation of its positive correlation if it persists.

The performance relative chart shows everything in in decline against the dollar today, but gold less significantly so.

With the bulls putting the correction behind them we are positive once more. Even if there were to be renewed weakness, we REMAIN MEDIUM TERM BULLISH ON GOLD. With real yields expected to remain low and negative with the massive easing of monetary policy, we expect gold to remain supported.

 

Support
  • $1717/$1718 – 17th and 22nd April highs, near term pivot
  • $1702 – old key March high, increasingly a key pivot
  • $1691 – near term pivot support
Resistance 
  • $1738 – 16th and 23rd April highs
  • $1746 – key multi-year high, 14th April
  • $1754 – November 2012 high

 

Technical Analysis

The breakout on gold has been strong, with two decisive bullish candles in the past two sessions. However, this morning, we have just seen the bulls taking a step back and the price has dropped slightly. At this stage we continue to see intraday weakness as a chance to buy though and it should be an opportunity.

We continue to expect a retest of the $1746 April high (also a more than seven year high) in due course. Momentum indicators remain positively configured with Stochastics swinging higher, MACD lines rising again and RSI back above 60. The hourly chart shows that this morning’s unwind has simply come back to the breakout support of Wednesday’s high, helping to renew upside potential. The move has allowed hourly MACD and Stochastics to unwind whilst hourly RSI is now finding support around the 50 mark.

Price action in recent days also shows that the pivot support at $1702 is now a key near term gauge of support now for the bulls. This old March high has been used as a turning point on several occasions recently and is supportive now. A move back under $1691 would be needed to confirm a decisive retreat of the bulls in this breakout now. Above $1746 is the November 2012 high of $1754, but the main resistance is around $1795, which is the 2012 high for the year.

STRATEGY: Holding support of $1692/$1702 we now favour a retest of the $1746 high in due course. Below $1692 would neutralise the near term outlook once more, whilst turning corrective again below $1660 support which is now potentially another key higher low.

 

Richard Perry

Richard Perry

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