Gold performance has suffered recently amidst the acceleration of the risk rally, in a move which has significantly damaged the positive near to medium term outlook. Subsequently, we turn neutral as a more choppy outlook has developed. Losing the positive medium term momentum means that gold could now be developing into more of a medium term range play between $1660/$1764.
As we lay out below in the technicals section, gold has struggled to sustain upside traction as momentum has faltered. This is coming as the correlation with Treasury yields is re-asserting. The rolling 12 month average correlation between gold and the US 10 year yield is -0.5 (which is pretty strong). Right now, yields are still stuck broadly ranging between 0.55% and 0.80%. The tick higher in yields has bee consistent with the decline on gold.
We continue to see that yields are a range play (with the Fed being such a massive on-going buyer yields are not moving sustainably higher any time soon). This is likely to continue to see gold ranging too. It certainly makes it difficult for gold to sustain traction in bull runs (which we have seen in recent weeks). It makes for a choppy near to medium term outlook on gold (something that is reflected in the technicals too).
We continue to view the longer term outlook for gold remains favourable for the price to be supported and for it to move higher. Real yields low or negative will sustain an attraction for gold, whilst deflationary forces help to support gold, along with enormously accommodative monetary policy. The issue is that in the nearer term, it will make for difficult trading with swings in the market likely to persist.
All considered, we continue to view near term price weakness as an opportunity to add to longer term positions.
- $1689 – 3rd June low
- $1681 – 6th May low
- $1668 – 1st May low
- $1722/$1725 – near term pivot band
- $1744 – 1st June high
- $1753 – 20th May high
The immediate bullish outlook for gold has been significantly compromised by price declines of the past two sessions. We have recently been discussing how difficult the upside moves are becoming for gold. Two decisive negative candles of the past couple of sessions reflects this. Since the March low, the market has been trying to pull higher, but is consistently being impacted by near term corrective moves. These moves have been breaking ever shallower uptrends. The latest breach of a very shallow 8 week uptrend shows that near to medium term moves on gold are increasingly choppy.
All the while, momentum indicators have been sliding lower over a medium term basis. The lower highs on RSI are now added to by a move below 50. MACD lines are sliding ever back towards neutral. Stochastics are turning lower under neutral. This makes for a difficult market to make much on the long side on a near to medium term basis. Breaking the support of the low at $1693 now means that $1744 is a key lower high under $1764.
Whilst the medium to longer term fundamentals on gold remain strong, it is increasingly clear that the near term trading moves are difficult to navigate. The market has stabilised to an extent this morning (and it is interesting that this comes with a slight corrective move on risk appetite). Where previously the lows where coming between the 21 day moving average (today at $1721 and interestingly around the old $1722 pivot) and the former 8 week uptrend (around $1704 today), if this now turns into a basis of resistance for another lower high, we may need to start factoring in a deeper corrective move towards $1660/$1668. In the meantime, there is a choppy sideways range to trade.
STRATEGY: Having broken the reaction low at $1693, the near to medium term outlook has become increasingly uncertain. As such we turn neutral and look to play gold as more of a medium term trading range between $1660/$1764. Although we continue to look for a long term move higher, the uncertainty will make for a difficult near term trading outlook.