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Gold hit all time highs, but how much further can it go?

Trading outlook:
The incredible run higher of the past week shows little sign of stopping. Hitting all-time highs on gold opens blue sky trading for gold. With the breakout, we remain bullish but have to also be cautious now, given the increasingly overstretched near term momentum. We are on the lookout for exhaustion signals and potential profit-taking. However, for now, the bulls remains firmly in control.

 

 

Fundamentals/Newsflow

The bull run on gold continues to accelerate away. The chart below shows a move above $1920 to an all time high.

 

However, with gold also marking ever higher all-times highs priced in euros and sterling, it is clear too that gold is an asset performing strongly in its own right as well.

 

The dollar weakness has been a clear source of the move on gold (along with falling yields).

 

The Dollar Index has now broken below its key March low and this is a bearish move for the dollar moving forward. Any near term technical rally on the dollar (perhaps into 94.63/95.70 on Dollar Index) will a likely generate profit-taking signals on gold. Despite this, we would still view this as a near term move and be another chance to buy gold.

 

Furthermore, we also believe that with Treasury yields stuck around the floor of recent months, this could also mean that buying pressure in this bull run on gold could begin to dry up (at least near term).

 

Despite all this though, the price seems to be going just one way right now. However, nothing goes up for ever though, and we look for technical signals to give us an indication of a near term turning point.

Near term moves aside though, 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. 

 

Support
  • $1905 – 24th July high
  • $1898 – 23rd July high
  • $1878 – near term pivot support
Resistance 
  • $1943 – intraday high on 27th July, currently the all-time high
  • $2000 – enormous psychological barrier

 

Technical Analysis

This incredible bull run on gold has now hit an all-time high on a move above $1920 (the previous all-time high from September 2011). It is a remarkable run (although pales in comparison to the move on silver) which shows little sign of stopping either. Strong bull candle after strong bull candle as intraday weakness continues to be bought into. The next level of note is the $2000 round number and psychological resistance.

There are increasing questions of how far this run can last? Technical indicators are very stretched, and there is a clear risk that the elastic could snap. Gold has added c. $140 in just over six sessions. The daily RSI is now at 85 (the January rally got to 86 before near term profit taking hit). Despite this, the developing negative divergences that were on the hourly chart have been broken by this morning’s move. We will often see with these gold rallies that there is a final intraday blowout before a corrective move set in later in the session. The rising 21 hour moving average (currently $1910) has been a very good gauge throughout this rally of the past week. Initial support is at $1898/$1906.

 

STRATEGY:  We continue to back the breakout on gold , but we have to also be alert to any near term profit-taking signals. Below $1898 would be a signal today, especially on a closing basis. We would though still view any near term correction into support as another chance to buy for further medium term upside.     

 

 

Richard Perry

Richard Perry

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