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CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage. 68% of retail investor accounts lose money when trading CFDs with this provider.
You should consider whether you understand how CFDs work and whether you can afford to take the high risk of losing your money.

Gold breakout to multi-year highs but has it still got the legs?

Trading outlook:
The strength of gold is now really coming to the fore on the breakout. Whilst it has been far more of a safe haven flow in recent times, there is an underlying support that is reflected in its breakout as risk has been positive today. We continue to expect further gains and any interim weakness will be used as another opportunity to buy.

 

 

Fundamentals/Newsflow

It does seem as though whenever Fed chair Powell speaks, the gold bulls sit up and take notice right now. Last night’s TV interview showed that although negative rates are still not in Powell’s mind, the Fed has the capacity to ease monetary policy further if it were required, Powell focused on eye watering levels of unemployment (c. 20% to 25%) and an enormous deterioration in the growth outlook (a decline of 20% to 30%). The Atlanta Fed’s GDPNow model suggests that the US economy is running on GDP for Q2 of c. -42% right now). The need for further Fed action may well be round the corner.

This is positive for gold. Whilst risk appetite has started off well today, gold has broken decisively clear of resistance to trade at multi-year highs. In recent sessions, there has been more of a safe haven bias to gold. Despite broad sentiment appearing strong today, there is still a very much of a concerning outlook for risk across major forex, but this something that gold is apparently benefiting from.

However, gold is breaking out whilst other asset classes continue to range. There are ranges still on the dollar and US Treasury yields. This may just give the gold bulls another opportunity to buy on a pullback.

 

The correlation with equities has become decoupled now. This linkage is not a great signal for gold right now.

 

The performance of gold (and to an even greater extent, silver) have been impressive in the past four weeks. This performance is accelerating on the breakout.

 

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.

 

Support
  • $1746 – key breakout support, old April high
  • $1738 – 23rd April high
  • $1722 – 7th and 8th May highs
Resistance 
  • $1764 – intraday high, 18th May
  • $1795 – 2012 high
  • $1802 – November 2011 high

 

Technical Analysis

Breakout on gold! We have been noting the increasingly positive signals of recent sessions on gold. The positive candlesticks have been racking up in succession and now the market has burst to new multi-year highs. Such is the strength of the early move today, the market is now through to its highest level since 2012 and the next real resistance is not until $1795 (the 2012 high).

The market has been trading in a range $1660/$1746 over the past month, meaning that if the move successfully confirms the breakout (a decisive close above would do it) there is an implied breakout target area of around $1810/$1830. Momentum is increasingly strong with the move, but also has upside potential too, with RSI into the mid-60s (January and February breakouts took RSI towards 80 and over). A bull cross on MACD and strong Stochastics add to this too.

The hourly chart shows the impetus has just reduced in the past couple of hours with stretched momentum, so perhaps a mini correction is preparing. However, on an initial pullback basis, the old key high at $1746 is now supportive, and there is a good band of support between $1722/$1746 as a medium term buy zone. A failure under the old $1702 breakout would abort the bullish targets now.

 

STRATEGY: A close above $1746 would confirm the breakout. Whilst we support further gains, the near term technicals suggest buying the pullback. There is good support now between $1722/$1746. Our bullish outlook would lose some conviction under $1722 and we would turn neutral below $1702. We favour long positions towards $1800. 

 

 

Richard Perry

Richard Perry

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