Gold is taking on more of a safe haven flow recently. This is generating positive momentum as broad market sentiment has deteriorated recently. The resistance of the month long trading range is now being tested. We continue to expect an upside breakout from the consolidation as the medium to longer term fundamentals remain strong for gold.
A strengthening outlook is forming on gold. Major central banks remain dovish (even if the Fed continues to rebuff calls for negative rates). Broad market sentiment is less certain about the risk rally now and with gold taking on more of a safe haven bias again, there is a positive momentum to gold. This is reflected in its correlations.
Moves have been increasingly (negatively) aligned with US Treasury yields once more (the normal negative relationship between gold and the US 10 year yield is re-asserting in the past week.
Gold and the dollar have also been relatively well aligned recently. This time, positively as the dollar is seen as a safe haven. This has pulled the 21 day Correlation into positive territory. It would seem that the safe haven attraction of gold is outweighing the negative aspect of it being priced in dollars.
There is far less of a steer from equities recently. The correlation has reverted back to around zero. Whilst there is still an orderly outlook to any selling pressure on equities, we expect that the correlation with gold will remain around or below zero. We will though be watching the VIX Index for any spikes higher, as clearly this would be commensurate with sharper equity declines, which could weigh on gold (due to margin calls).
Looking at the relative performance of gold over the past week and a half, the performance has been strong (only bested by the surge in silver).
Fundamentally, we continue to expect gold will be underpinned by hugely dovish policy of major central banks and falling/low/negative real yields. This is all positive for gold as its traditional correlations take hold. The main caveat remains a massive renewed equity market sell-off and gold being sold as part of broad portfolio liquidations. However, we still see any weakness 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.
- $1726 – intraday low, 15th May
- $1722 – 7th and 8th May highs $1697 – 13th May low
- $1690 – 11th May low
- $1738 – 23rd April high
- $1746 – key April high (and multi-year high)
- $1754 – November 2012 high
After more than two weeks of trading with little or no conviction from one session to the next, are we finally seeing the gold bulls positioning for the next leg higher? With an uptrend forming over the past two weeks, the bulls have now strung three positive closes together, with some strong candlesticks too. A breakout above $1722 has brought the market to a three week high and the market is testing the key resistance of the range highs $1738/$1746.
There has been a shift in momentum indicators too, where RSI is back in the 60s, Stochastics accelerating higher and even MACD lines are on the brink of a bull cross. Trading decisively clear of the old $1702 pivot now means that the support is now at $1722 for the basis of the upside test.
We continue to expect the breakout to be seen and a move to new multi-year highs. Above $1746 would see gold at its highest levels since November 2012, where it formed a high at $1754. The next key upside level is $1795 which was a basis of resistance throughout 2012. The hourly chart shows that the bulls have consolidated yesterday’s move and are looking to go again today with momentum strong. There is a near term buy zone now between $1722/$1726. A move back under $1709 (yesterday’s low) would revert to the ranging outlook again.
STRATEGY: With the market positioning for the next breakout, we look to use intraday weakness towards $1712/$1722 support band as a chance to buy. We are looking for new multi-year highs through $1746 in due course. Our bullish outlook turns neutral on a close under $1690, but we would still favour near term weakness for medium to longer term upside. This would change under $1640 support.