Gold continues to consolidate as the outlook for yields and the dollar has become less decisive in recent sessions. However, technicals on gold remain strong for further upside. Furthermore, the expectation of subdued yields and further dollar weakness should help to ensure weakness remains a chance to buy for additional gains in the coming weeks.
The breakout on gold has hit the buffers in recent sessions. It comes as Treasury yields have settled a shade above a key floor around 0.54%/0.60% on the US 10 year. This is taking some of the wind out of the sails of the bull run on gold. A six week downtrend on the 10 year Treasury yield is beginning to creak, and this plays into the trend breach on gold and recent price consolidation too.
Unless there is a huge economic deterioration, yields are unlikely to move sharply lower from here. Despite this, the chatter about the Fed about controlling the yield curve is also anchoring yields around these levels. This could mean that whilst gold retains a positive outlook, the move higher could become less certain and more prone to near term shocks. We would still see any near term price shocks (i.e. weakness) as a chance to buy.
The other key driver of gold remains the dollar. The Dollar Index is pressuring the 95.70 key support but so far is yet to breach it. How the dollar reacts to this support could be the driver of the next move on gold. A downside break of 95.70 would likely pull gold higher (given the strong negative correlation still in place). This is likely to be the source of the next move on gold.
Our long term position on gold remains bullish. Within this we expect further upside to be seen in due course, even if the path to get there is not smooth.
The fundamental drivers of driving gold higher are still in place. We still expect yields to remain subdued and an ongoing dollar weakness in Q3. This will 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.
- $1794 – 16th / 17th July lows
- $1789 – 1st July high ($1790 was 14th July low)
- $1770 – 6th July low
- $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)
For the past week and a half since the breakout above $1789, a consolidation has been developing on gold. This has taken the formation of a mini-trading range between $1790/$1818. The consolidation has broken a five week uptrend and resulted in strong momentum indicators just losing their impetus. However, there still seems to be an appetite to support gold into near term weakness.
Since the big March volatility surge, gold has been consistently building foundations at higher levels for the next push into multi-year highs. There have been phases of near term weakness, lasting usually around a week, but time and again, the bulls return stronger than before. We still see further upside in the gold run higher, with implied targets from the April to June trading range breakout, implying anything from $1820 (on a conservative basis) towards $1868 in the coming weeks.
Holding support at $1789 would be strong, but any supported weakness to between $1764/$1789 would be bullish too. It would help to renew upside potential for the next leg higher. It is only really a move below $1744 which would seriously question the bullish outlook. This is key breakout support from the old range, but also now below the rising 55 day moving average (currently $1745) which has so rarely been breached over recent months.
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.