Although the bulls have taken a step back, gold is still holding its breakout to multi-year highs despite a mini rebound in yields. We expect that the gold breakout will be underpinned by further subdued yields and dollar weakness in the weeks ahead. As such near term unwinding moves on gold should be seen as a chance to buy.
The breakout on gold last week came as bond yields have been tracking lower and the US dollar has been weakening. Whilst there has been a slight near term kick back on yields and the dollar, we expect these moves will be at least sustained (yields) or continued (dollar) in the coming weeks. As such we expect that with the historic negative correlations with gold on both, this will help to support the gold breakout.
The move with the dollar seem latterly to be the more pertinent for gold. Increasingly we are seeing signs that the dollar is losing its safe haven appeal (amidst questions over the implications for the US economy from the rising COVID-19 infections). We believe that this will mean the US relative recovery from the pandemic will be weaker, and the dollar will be a casualty from this. This all plays into the strong performance of gold.
Treasury yields are still a factor (note the trends on both the 10 year yield and gold in recent weeks). There could still be a choppy phase of trading ahead for yields amidst constant newsflow shifts with a tug-of-war between firisng infection rates and economic re-openings continuing. This, along with any sense of controlling the yield curve from the Fed, could leave yields subdued (maintaining a floor on the 10 year yield around +0.50%/+0.60%). The impact on gold may mean that consistent moves higher may be difficult to hold traction, but also mean that retracements will lend further trading opportunities along the way.
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
- $1810 – 10th July high
- $1817.70 – 8th July high, currently the multi-year high
- $1820 – conservative implied target from April/June range ($1858 is a bigger implied target)
The decisive breakout above $1789 was a key moment last week. It continued the run higher which has been flanked by a now five week uptrend and once more broke through a previous high to move to multi-year highs. We are backing this bull run on gold and although the bulls took pause for breath towards the end of last week, importantly, there has been little damage to the breakout.
There is still an appetite to support gold into weakness. We see anything into the $1789/$1800 area as a chance to buy. Momentum indicators remain strongly configured, with RSI in the high 60s, MACD lines still advancing and Stochastics still in strong configuration (even if they have slipped slightly in recent days). We look for further upside pressure above Wednesday’s high of $1818, with our implied target range from the April/June consolidation rectangle suggesting moves towards $1820/$1858 in the coming weeks.
The bulls would lose some of their control under $1764 but the bullish outlook would only begin to come under considerable strain under $1744.
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. Given the strength of the breakout, below $1744 would be a shift of outlook.