The bull run on gold just won’t let up and the all-time high is still in view. The dollar is on the brink of another major breakdown, whilst Treasury yields are falling to sustain the fuel the bull run on gold needs. Although exhaustion signals are emerging for gold, the bulls are still preventing a profit-taking correction. At such elevated levels we are though cautious, and look for signals of a pullback, which would still just be another chance to buy.
Can gold sustain the run higher? The move in recent days has come in a sweet spot for gold where the dollar has been under pressure and yields have also been falling. Can this continue?
The Dollar Index is now testing the key support of 94.63 which was the March low. The importance of a decisive breakdown could be huge for the medium to longer term outlook. Equally though, the importance of this support could be an area where near term selling pressure begins to stall.
A decisive downside break of 94.63 on Dollar Index would shift the narrative on the outlook for dollar weakness again. Below the July and September 2018 lows of 93.70 would open the 89/90 area on a long term basis. This would certainly be a driver of continued longer term gains on gold.
As for Treasury yields, they have been under renewed pressure in recent days with the market taking a view on US economic underperformance through the second half of 2020, in addition to fears over the US/China relations. A key floor of 0.54%/0.60% is being tested. However, given the market is preparing for some sort of yield curve control from the Fed, will this area hold? A failure to break this floor would take the wind out of the sails of this bull run on gold. And may be enough to induce some profit-taking.
For now the dollar selling pressure is certainly helping to fuel the gold attraction still. But both Dollar Index and the 10 year Treasury yield are around key levels which may see the gold run beginning to stall and possibly retrace (at least near term).
Near term moves aside though, fundamentals underpin and point to continued support for gold. Loose global monetary policy for many months (and possibly years) to come, will keep real yields subdued/negative and should continue to mean gold is attractive. Subsequently, this is still a good environment to be buying gold into weakness.
- $1878 – intraday low 23rd July
- $1868 – intraday low 23rd July
- $1860 – near term pivot support
- $1898 – 23rd July high ($1900 is round number resistance)
- $1920 – all-time high
- $2000 – enormous psychological barrier
The run higher on gold has posted three huge bullish candles in a row since breakout out above resistance at $1818. The market has come up just shy of the psychological $1900 barrier (with a high of $1898 yesterday) and is one bullish session away from the all time high of $1920. Whilst we back this bull run higher, we continue to be mindful of what could still be a bout of profit-taking which, given the acceleration higher, could be a painful near term slip back.
Momentum signals remain strong but stretched. The 14 day RSI is now over 80, and interestingly, the Stochastics are just beginning to cross. We are still looking for signs of exhaustion in this move. The hourly chart has been showing developing negative divergences on hourly RSI and hourly MACD lines over the past two days. As the market has consolidated overnight, the rising 21 hour moving average (which has been a very good gauge of support) is again being used as support.
There has been a run of higher lows in recent days which have been using old resistance as a pivot. Initially we are looking at a decisive move below $1880 as an early warning, whilst a move below $1868 (intraday low from yesterda0 would begin to add to corrective pressure. Seeing the hourly RSI below 50 would be a confirmation too. If momentum gets behind a correction, we cannot rule out an unwind towards $1840/$1845 or even to the $1818 breakout.
STRATEGY: We continue to back the breakout on gold and look towards the all-time highs. However, we are also on alert for near term profit-taking signals. Below $1868 would be a signal today, whilst below $1845 would drag gold back into $1789/$1818. We would though still view any near term correction as another chance to buy for further medium term upside.