The ongoing consolidation above the $1789 breakout has now broken the support of a six week uptrend and questioned the strength of the run higher. This is coming as both Treasury yields and the dollar approach key levels. Whilst we are still happy to buy into weakness, unless there are significant further moves lower on USD or yields, this could reflect the beginning of a less decisive move higher on gold.
The correlations that gold has with both the US dollar and US 10 year Treasury yield are very strongly negative at the moment (both being greater than -0.8 on a 21 day Correlation basis). However, there are key levels on both the dollar and yields that are now approaching. It is interesting that gold is breaking a six week uptrend, just as these key floors are nearing.
There are conflicting forces that are playing out on gold right now. Market risk appetite has picked up in the past week as COVID-19 vaccinations have seemed to be making good progress. Gold still has a safe haven attraction that means that the breakout on gold has stalled slightly.
For now, the Dollar is still trending lower (over the past two months). However, for gold to sustain decisive traction, the support on the Dollar Index at 95.70 needs to be broken. Yesterday’s corrective slip on gold came as the dollar rebounded. It shows that the dollar moves are still key for the near term outlook on gold (a -0.82 correlation reflects this too). For gold to decisively move higher once more, it is likely to come with a downside break on the dollar.
We are though also looking at the fact that Treasury yields have been falling recently. Again this is with a strong negative correlation with gold. However, have yields got further moves to the downside? There is a big floor on the 10yr yield around 0.54% / 0.60% which is nearing. Without a decisive downside breach of this range, it could lead to some choppy trading for gold in the weeks ahead. Right now, the dollar seems to be a crucial factor for the gold price pulling higher. even though we see yields are likely to remain anchored around these levels, it may hamper the move higher on gold.
Our long term position on gold has been bullish for a while and remains so. We expect further upside to be seen in due course, but the trend breach on gold coming as yields and the dollar reach key levels, could reflect a less certain move higher.
Despite this, we still expect yields to remain subdued and an ongoing dollar weakness in Q3. This will help to sustain gold at these elevated levels and perhaps test the $1920 all time high in due course. It may just mean that the path to get there is bumpy.
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.
- $1794 – 16th / 17th July lows
- $1789 – 1st July high ($1790 was 14th July low)
- $1770 – 6th July low
- $1814 – 15th July high
- $1817.70 – 8th July high, currently the multi-year high
- $1820 – conservative and initial implied target from April/June range ($1868 is a more bullish implied target)
The bulls have just taken a step back in recent days, and this has led to a consolidation that has now broken the support of what was a six week uptrend. We have been mindful that a continuation of the consolidation may lead to this trend breach, but how the bulls respond now is important. A trend breach through consolidation, does not necessarily mean that the market will be moving into freefall. Holding on to the support of the breakout at $1789, we still see the bulls in control.
There has been a slight deterioration in the medium term momentum signals, primarily with the MACD lines crossing lower. This may still weigh on the price on a near term basis, and even if there were to be a move below $1789 we would still be bullish on gold whilst the breakout at $1764 is intact. After yesterday’s solid negative candlestick, the bulls need a reaction today. Another solidly negative candle today would be the first time in six weeks this would have been seen. Early signs of support though are encouraging.
Although this trend breach means that we are a little more cautious of the immediate state of the breakout above $1789, we would still be looking to buy into supported weakness. Our strong bull medium term outlook would change below $1744.
STRATEGY: We are happy to back the run higher but would look to use any near term weakness towards the previous breakouts which are a support band between $1764/$1789 as an opportunity to buy for continued upside. A target range between $1820/$1868 is implied in the coming weeks. Given the strength of the breakout, below $1744 would be a negative development now.