A huge boost for broad risk appetite has seen the attraction of gold wane in the past 24 hours. The prospect of a false breakout has rocked a strong outlook and we are more cautious for the immediate prospects. The bulls need to quickly dust themselves down and re-establish the trend higher for us to be confident again. We do remain positive over a medium term basis though, and are confident that this near term weakness will be supported at some stage, for gold to post renewed multi-year highs again. For now though, the bulls are under pressure.
Gold reacted strongly yesterday morning in the wake of accommodative comments from Jerome Powell over the weekend. However, when risk appetite got the double whammy boost of the potential of a COVID-19 vaccine as well, this drove a shift in outlook for gold. The bulls are still feeling the legacy of this outlook shift this morning.
Gold has played as far more of a safe haven asset in recent weeks and so with risk assets strongly moving higher, gold has seen some profit taking. Look at the decline in the relative performance of both gold and silver (the chart is taken of performance over the past three weeks). with moves from yesterday and today, major currencies at the riskier end of the scale are pulling higher against the dollar, whilst gold is in decline. The main exceptions to this are the ultra safe haven yen and the Swiss franc. This certainly reflects gold being a safe haven and suffering for now.
However, the question will therefore be one of how much traction is there in this risk rally? Whilst we are “risk-on” it is likely that gold will struggle on performance. However, we have been here before with the reaction to COVID-19 vaccines. A sharp boost to risk for a session or so, but the move tends to be short lived. If this happens again, then the slide on gold is likely to be short-lived. Even if risk appetite does not move into retreat, we still see the medium to longer term fundamentals of gold will enable an underlying demand will support it. We do not expect to see too much downside for gold before weakness is seen as a buying opportunity.
We see the fundamentals as being supportive for gold over the medium to longer term and that any near term price weakness as a chance to buy.
- $1722 – 7th and 8th May highs
- $1709 – 14th May low
- $1702 – old pivot and breakout
- $1740 – intraday high 19th May
- $1746 – old key breakout from former April high
- $1764 – 18th May high
The breakout to new multi-year highs has not gone quite to plan for gold, but the prospect is not over yet. Given the strength of the early morning position on gold yesterday, we had been looking for a closing breakout above $1746 and then to see an orderly pullback towards $1738/$1746. In the event, a sharp intraday retracement to $1726 and what looks to be a shooting star candlestick is a warning.
We still hold a positive view of gold, but the bulls need to re-establish themselves today. Another negative candlestick today, with a close under $1722 would make us wary of the backing upside. Momentum is still strong, but again the bulls need to react today. A positive candle that steadies the ship is needed.
Essentially, the two week uptrend support remains intact at $1706 today but given how the bulls were positioning yesterday morning, turning back from $1764 and losing $1722 support would be disappointing now. The hourly chart still suggests this is a pullback into support, but it is an important phase for seeing how strong the bulls are now.
We are still confident of further multi-year highs in due course, and are happy to buy into weakness. It is just that a bull failure on this breakout pushes this outlook further into the future.
STRATEGY: The failed breakout is a concern, but for now the support band $1722/$1746 is holding (just). If the bulls can re-establish support here then they will regain control, A breach of $1722 means the immediate bullish prospects are neutralised. Back under $1702, the outlook is on far more shaky ground. We still favour medium to long term positions towards $1800 but the near term outlook has less conviction for now.