Consolidation has set in on gold following the breakout. Strong technicals are still in force, whilst falling yields and a negative dollar outlook should help to ensure that any near term gold weakness is still a chance to buy. We still look for further multi-year highs in due course and a continuation of the bull run in the coming weeks.
Over recent sessions, gold has consolidated in the break to multi-year highs. This has come with a slight rebound on Treasury yields and the dollar beginning to consolidate too. However, we continue to view these moves as being near term and are not expected to last. There may be some further kick back in these near term moves which may induce a near term gold correction however we would view this as another opportunity to buy gold.
Risk appetite looks to have faltered in recent weeks. This is one of the reasons why gold has broken higher. We see that as the July economic data begins to show the June data recovery as being short-lived, this will further weigh on risk. This will benefit gold. Yields will subsequently remain low, helping to underpin gold. The chart below shows the negative correlation with gold and the 10 year Treasury yield remains strong.
We also see the dollar weakening in the coming months, something that plays into gold moving higher. We see the ever worsening infection rates in the US will mean the economy re-opening is pushed back or reversed. The US economy recovery lags other major areas, and the dollar will suffer. The chart below shows the gold and dollar correlation is at its most negative for the past three months.
Right now though, consolidation has set in on gold. The relative performance chart show that gold is not the only asset measured against the US dollar to see consolidation. Gold has though still added around +1% in the past couple of weeks.
Our long term position on gold has been bullish for a while and 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.
- $1794/$1795 – lows from 9th and 10th July
- $1789 – 1st July high
- $1770 – 6th July low
- $1813 – 13th July high
- $1817.70 – 8th July high, currently the multi-year high
- $1820 – conservative and initial implied target from April/June range ($1858 is a bigger implied target)
Gold continues to consolidate the latest breakout to new multi-year highs. We have backed the gold run higher, and so far we continue to do so. However, with a balance of small bodied and mild negative candlesticks in recent sessions, there is a sense that there is a little caution creeping in. Technically, the set-up is still bullish, as momentum indicators remains positively configured with RSI and Stochastics holding in strong positions. The support of a five week uptrend which is still intact and comes in today at $1792 (which is above the $1789 latest breakout) will become a key early warning sign now. A breach of this trend could begin to reflect a near term tiring of the move higher and potential correction. Moving under $1789 would add to this potential.
However, we would still view weakness as another chance to buy into what is still a very strong medium to longer term bull trend. Any corrective move that finds support between $1789 and $1764 would be another good chance to buy.
We still expect $1818 will not be a key high for long, as the two month consolidation range breakout implies a target range of $1820/$1858. Given the bull market outlook, we would expect a good chunk of this implied target to be achieved in the coming weeks. A move below $1744 would be our signal to shift from our bullish stance and turn neutral now.
STRATEGY: We are happy to back the run higher but would look to use 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/$1858 is implied in the coming weeks. Given the strength of the breakout, below $1744 would be a negative development now.