Gold continues to consolidate its breakout to multi-year highs as it has formed a tight trading band of the past week. Whilst a minor dollar rebound has held the bulls back int he past 24 hours, we continue to expect gold to break higher in due course. Even if the trend higher is broken, with strong fundamentals in place, we would be looking to use near term weakness as a chance to buy.
The breakout to new multi-year highs above $1789 has consolidated over the past week. However, with gold’s negative correlations still very strong, we see further upside as likely on gold in due course. The US dollar is the primary driver at the moment, but equally, we see moves on the US 10 year Treasury yield have a key role to play.
In the past couple of weeks, gold has developed an increasingly strong negative 21 day correlation with the dollar (today at -0.80). This correlation has become extended and perhaps even approaching extreme (historically the 12 month average of the correlation is -0.14), but the give the strong trends forming on both, this does not suggest an imminent breakdown of the correlation. Moves on the dollar point towards a downside break on the Dollar Index below 95.70 in the coming weeks and this is likely to be a driver of the next upside move on gold. As the dollar ticks higher early today, gold has slipped. However, the trend lower on the dollar continues and we are happy to be long of gold.
Yields are also trending lower, but in a slightly less pronounced fashion. With comments from the FOMC’s Eric Rosengren (who leans slightly hawkish on the FOMC) talking up the potential for yield curve control, we expect to see yields subdued in the coming months. This will add to support for gold. Given the fact that yields are ticking a shade lower this morning, and gold is also lower (whilst USD is slightly higher), this would suggest that the dollar is still the main driver of gold for now.
The relative performance chart of the past couple of weeks, shows gold performance strength is only outshone by silver. Pretty much everything is slipping against the dollar today.
Our long term position on gold has been bullish for a while and remains so. We expect further upside to be seen. Subdued yields and an ongoing dollar weakness in Q3 would help to sustain gold at these elevated levels and perhaps test the $1920 all time high in due course. Fundamentals underpin and point to continued support for gold. Loose global monetary policy for many months (and possibly years) to come, will keep real yields subdued/negative and should continue to mean gold is attractive. Subsequently, this is still a good environment to be buying gold into weakness.
- $1789 – 1st July high ($1790 was 14th July low)
- $1770 – 6th July low
- $1764 – 18th May high
- $1814 – 15th July high
- $1817.70 – 8th July high, currently the multi-year high
- $1820 – conservative and initial implied target from April/June range ($1868 is a more bullish implied target)
Since hitting the multi-year high of $1718 last week, there has been a consolidation on gold. A series of candlesticks all posted within a $29 range above the $1789 breakout. With the support of the five week uptrend still underpinning the move higher, gold has posted three positive closes in a row. The relatively small candlestick bodies does suggest a cautious approach for now, but we are still happy to back the breakout and look to use any near term weakness as a chance to buy for continued upside.
However, as the market slips back slightly once more today, there is a feel that this is still a consolidation, and one which may breach the trend support (today at $1801). Even if this rend is breached, if the market continues to build support above $1789, then the outlook remains strong. It would only really be a move below $1764 (another previous breakout) where the bulls begin to lose their control.
Momentum indicators remain strongly configured, even if they are slightly hampered by the consolidation. We still look for another breakout above $1818 and a move towards an implied target from the April/June consolidation range breakout of $1820 and perhaps as far as $1868 in the coming weeks. A move below $1744 support would neutralise the medium term outlook.
STRATEGY: We are happy to back the run higher but would look to use any near term weakness towards the previous breakouts which are a support band between $1764/$1789 as an opportunity to buy for continued upside. A target range between $1820/$1868 is implied in the coming weeks. Given the strength of the breakout, below $1744 would be a negative development now.