With the unwind from the breakout holding, we look to use a near term buy zone between $1625/$1642 as an opportunity for long positions to push for a test of the $1702 March multi-year high.
Gold has held the breakout to near four week highs and the outlook remains positive. We continue to see gold moving in line with the US dollar. The correlation is increasingly positive in the past week and suggests that the two have a safe haven correlation.
It is interesting that the same cannot be said for US Treasury yields. The US 10 year Yield has edged higher in recent sessions (selling bonds), even as gold has broken out. This is a slightly abnormal move, and as we continue to see the correlation negative, we expect the more normal relationship (which is negative i.e. yields lower/gold higher) to reassert in due course.
(N.B. we have realigned our chart of gold and UST yields.)
Correlation with equities is also slightly abnormal at the moment, remaining positive. However, equities volatility is in the process of reducing and this should see the usual negative correlation between equities and gold begin to turn negative once more.
Gold continues to outperform major currencies, including the US dollar since early March. Note today, gold (shown below as the yellow line) is trading higher whilst all other forex majors are underperforming/ticking lower versus USD.
We are medium to longer term bullish on gold. With real yields expected to remain low and negative with the massive easing of monetary policy, we expect gold to remain supported.
- $1640/$1642 – breakout support, 7th April low (23.6% Fibonacci retracement of $1445/$1702)
- $1625 – 3rd April high
- $1605 – 3rd April low (also 38.2% Fibonacci retracement of $1445/$1702 is at $1604)
- $1671 – 7th April high
- $1702 – Multi-year high – 26th March high (23.6% Fibonacci retracement of $1445/$1702)
- $1795 – 2012 high (October)
Given the strength of Monday’s huge bull candle, gold was always liable to see some sort of near term retracement during yesterday’s session. However, the conviction of the breakout held firm on a pullback to the breakout of $1642 and suggests that this near term corrections is still a chance to buy. Momentum indicators are positively configured across the board, with RSI confirming the breakout to multi-week highs, whilst Stochastics and MACD lines pull into positive configuration. There is an uptrend of the move in the past two weeks which rises as support today at $1617 and given the Average True Range is still $45, we cannot rule out this trend line again being tested in the coming sessions. However, we believe this breakout to be valid and the market will be eyeing a move to test the $1702 March high again. The hourly chart shows good breakout support of underlying demand in the band $1625/$1642 from a clutch of highs throughout late March/early April. We see this now as a near term “buy zone”. The hourly RSI consistently above 40 reflects strength in momentum too and weakness is a chance to buy. Support from Monday’s low at $1595 is now a key higher low.