Our caution with the bull run was well-founded as near term profit-taking has set in. We see this as just an unwind of the bull run and once more will be a source of the next opportunity to buy.
We still see a strong negative correlation between the US 10 year yield and gold (we show the move in the chart below with the yield inverted). Subsequently, with the 10 year yield moving to all-time lows yesterday (below the previous low of 1.3210% from July 2016) we expect continued strength through gold. With real bond yields turning negative recently, we remain positive on the fundamentals of gold.
The newsflow on COVID-19 shows no sign of improving, so the underlying demand for safe havens, such as gold, will remain strong.
- $1636 – intraday low, 26th February
- $1628.70 – 25th February low
- $1611 – 8th January high
- $1660 – 25th February high
- $1688 – 24th February high
- $1695 – January 2013 high
Given the elevated levels of fear running through broad financial markets right now, the appetite to buy gold will likely remain solid. Yesterday’s decisive negative candle saw the market closing -$25 lower as a bout of profit-taking took hold. However, we see this as a near term move that has just tempered some of the exuberance, rather than changing the outlook. We see it as similar to the January bull run which culminated in a -$75 move back from the high, before the bulls took control again. Blowing the froth off the top can be a good thing for a bull run. Gold unwound -$60 to yesterday’s low, but already the signs are that the bulls are returning again. The move has unwound to 23.6% Fibonacci retracement (of $1445/$1688) at $1631 around which support is forming. Although momentum has lost some of its zing, there is still a sense that near term moves lower will find willing buyers again. The market may have closed a gap at $1649 (theoretically negative) we are not anticipating a deep correction. Also, given the rebound this morning, a close back above the old gap at $1649 would probably negate any implications of it. This may mark the early stages of a more considered phase of consolidation for gold, but weakness remains a chance to buy. The hourly chart shows support at $1628 above the $1611 key breakout. Above $1660 would re-open the upside.