With a consolidation for Friday’s US public holiday and lack of intent this morning, gold is a little subdued and could breach a multi-week uptrend. However, it is important for the bulls that the breakout is holding ground above $1764 and the outlook is still encouraging for further gains above $1800 and beyond. Our strategy continues to be to buy into supported weakness.
Gold has been consolidating in recent sessions. Its key correlations are sending out some mixed messages, but for now we are happy to continue to back the prospect of further upside.
Bond yields moving sideways reflects this consolidation. With US bond markets closed on Friday and showing little direction today, there is limited gauge from the primary correlation for gold. Broader trend are though still positive for subdued yields (yield curve control by the Fed would play into this) to be supportive for gold.
A falling dollar is gold supportive. Although the correlation has been more positive in recent weeks, we take this as gold holding up well in the face of a dollar rebound, rather than any lasting shift in the correlation (which remains historically mildly negative averaging over the past 12 months at -0.14). We expect a mean reversion to the more traditional mild negative correlation of the dollar and gold in due course.
We have focused previously on the recent four week trend lower on equities (taken as US E-mini S&P futures) and the corresponding uptrend on gold. Equities have picked up today amidst a better appetite for risk. This is breaching the downtrend, but gold is still (just) holding its uptrend. In the past week, gold has held up well in the face of a rebound on equities. This is encouraging for gold bulls and taken with a positive read through of a weaker dollar, it points to building support for gold.
Our long term position on gold has been bullish for a while. It has taken some time to break higher from the medium term range, and even then, this move is still not decisive, but it is holding. 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 in. Although we still anticipate a bumpy road on the the way higher, this will also provide opportunities to buy into any weakness.
- $1764 – old key May high and breakout support
- $1757 – 2nd July low
- $1744 – important pivot of lows and highs ( between $1744/$1747)
- $1779 – 2nd July high and previous high, 24th June high
- $1789 – 1st July high, now the multi-year high
- $1795 – 2012 high
Anyone trading gold on Friday may just as well have gone back to bed, as the market completed the smallest daily range (just $5) of 2020. Last week we focused on the four week uptrend, which had been briefly breached by the Nonfarm Payrolls volatility but essentially remained intact. This support of the uptrend could well be broken simply by consolidation this week.
What this does mean is that the bulls who have been driving the market to new multi-year highs last week, are just taking a breather. The question is whether this turns into a near term slip or is the precursor to the next leg higher. Support in the band $1757/$1764 will determine this. A closing breach of $1764 could see a drift back towards $1744/$1747 which is the next area of old breakout support.
Momentum in the run higher is just beginning to tail off slightly, but for now retains its positive configuration (with daily RSI above 60 and Stochastics above 80). Trading above $1764 we are still bullish on the near term prospects of gold to push above $1789 and into the $1800s (an upside implied target for the next few weeks can be derived around $1820). Below $1764 we look to use supported weakness towards $1744 as a chance to buy.
STRATEGY: The old trading range resistance between $1744/$1764 is now a basis of support for the bulls. We look to use weakness into this area as an opportunity to buy for continued upside towards an implied target of $1820 in due course. Below $1744 would now question the immediate positive outlook, whilst below the old $1720 pivot support would lose bull control again.