A strong run higher into the close on Friday has opened the prospect of an upside break on gold. However, with little cross asset confirmation of the move and little conviction today, we remain sceptical as to whether gold can sustain this move higher.
Our caution in Friday’s move higher on gold comes as the fundamental correlations that have re-established recently, did not back the move.
The correlation between gold and Treasury yields is still strongly negative, but yields barely moved on Friday and again have barely moved today. You would expect the 10 year yield to be finding traction below 0.60% for an upside breakout on gold to sustain momentum. This is not being seen.
So is the correlation with the dollar being the driver then? Again the correlation has become far more negative in recent weeks. The dollar has picked up and gold has been slipping back, until Friday. However, gold moved strongly higher at the same time that the dollar was higher.
Perhaps gold is moving in isolation for now, but it does though seem that gold is playing as a key safe haven asset, for now. The relative performance chart shows gold as the top performer of the past two weeks. The Japanese yen and Swiss franc are the only two major currencies stronger than the dollar in that time too, which suggests safe havens are performing well. Therefore it will be interesting to see if gold begins to lose upside if risk appetite improves again. Already this morning we see that the higher beta currencies are performing better. For now, gold is also holding on to gains, but can this continue?
Our long term position on gold remains bullish as the move higher will be underpinned by ultra loose monetary policy for months and possibly years to come (which will keep real yields subdued/negative). We expect the medium term range will be broken to the upside in due course and $1800 will likely be tested, however the path to get there, with a choppy near term outlook, could be tricky to navigate.
- $1736 – 18th June old high
- $1712 – 17th June low
- $1704 – 15th June low
- $1758 – intraday high 22nd June
- $1764 – 18th May high, key medium term range resistance
- $1795 – 2012 high
After several days of indecision and the market lacking conviction, on Friday the gold bulls found a big session to drive the market higher. The result has been an upside break through resistance at $1744 this morning. The first issue is now whether this is a move to be trusted.
There needs to be a close above $1744 , and ideally with conviction clear of the resistance. Initial gains may have been pared slightly, but so far the move is holding. Momentum currently looks to be improving on the daily chart, with RSI above 60, whilst MACD and Stochastics also tick higher. However, these upside moves on gold into the $1744/$1764 range on gold have struggled for months, and we would need to see conviction before getting excited that this may be the upside break we have been waiting for.
Ideally, the $1744 breakout now needs to become a basis of support, with the hourly chart showing $1736/$1744 now as a support zone. The hourly chart also shows a uptrend that can be derived over the past two weeks, coming in around $1726 this morning.
We have been looking for an eventual upside break above $1764, however, given the number of false signals on gold over recent weeks, we remain cautious for now.
STRATEGY: As the market moves towards a test of the medium term range resistance between $1744/$1764, the potential of an upside breakout arises. If near term support can now begin to form between $1736/$1744 then the prospects improve and we back tentative longs for testing $1764. Although we still favour long term positions higher towards $1795/$1800 in due course, we remain cautious until a decisive closing breakout above $1764 is seen. The ranging outlook re-establishes below $1730.