The bulls are looking to regain control now as a corrective downtrend has been broken and a new run of strength begins to develop. Near term, and even intraday, weakness is now seen as a chance to buy as the bulls begin to look towards a retest of the May highs again. Holding above the support $1722/$1726 will maintain this outlook of renewed improvement.
Donald Trump’s announcement on his reaction to China was less severe than expected but this has not damped the renewing appetite to support gold. Furthermore, we have seen that the dollar has broken down in the past few sessions and this should bode well for gold.
Gold still has a tradition of a negative correlation with USD. The past month has seen this correlation questioned. This has pulled the rolling 12 month average correlation up to -0.22 (from -0.27 a month ago) but this is still a mild negative correlation. Subsequently it is interesting to see the 21 day Correlation begin to grow increasingly negative in recent sessions as the dollar breaks down from a nine week consolidation range. This plays into the recent tick higher on gold and should help to usher the market towards a test of the recent $1764 highs in due course.
We are still a little wary of the read through that comes with a lack of real direction on the 10 year Treasury yield in recent weeks. Given the strong historic correlation with gold (rolling 12 month average of -0.5) we think this could be restrictive for the momentum of upside in gold in the coming weeks. However, this is likely to be an ongoing issue to contend with rather than an immediate impact.
We noted on Friday that the near term performance of gold was beginning to pick up. It seems as though the underperformance of a couple of weeks ago has turned. The past few sessions has seen all of the majors outperform the dollar, but it is interesting to see gold amongst the strongest performers (although silver remains the big outperformer, once more “gold on steroids”).
Looking more medium to longer term, we see the fundamentals for gold remain positive for support on gold. Real yields low or negative will sustain an attraction for gold, whilst deflationary forces help to support gold, along with enormously accommodative monetary policy. We continue to see near term price weakness as a chance to buy gold for longer term upside.
- $1726 – 29th May intraday low
- $1710 – 28th May intraday low
- $1693 – 21st May low
- $1744 – 1st June intraday high
- $1753 – 20th May high
- $1764 – 18nd May high and multi-year high
Gold spent much of last week with a mix of signals around an inflection point where the medium term positive outlook met the near term corrective outlook. It seems as though, once more the bulls are winning. We have long been buyers into weakness on gold. The near term corrective moves continue to be bought into as the market has been higher in aggregate over recent months. The only time that the strategy of using weakness to buy has been severely shaken was during the huge volatility of March. That aside, it has been a strategy that has worked time and again.
Once more, we see the market correcting into a support (this time a seven week uptrend) before rallying from $1693. The positive candles of Thursday and Friday, along with strong early gains today suggest that the bulls are pulling ahead once more. The move has broken a near two week downtrend and moved above resistance at $1735/$1740 (lower highs within the mini downtrend). Near term momentum signals are turning positive, with a bull cross buy signal on Stochastics.
Trading above a clutch of rising move averages adds conviction to what is increasingly a near term buy into weakness strategy again. Next resistance is $1753 before the $1764 key May high. Initial support $1722/$1726. Support of $1693 is growing in significance on a medium term basis now.
STRATEGY: The move to break the corrective downtrend has put the bulls back in control. This now means buying into intraday weakness for a test of the multi-year high at $1764. A failure below $1722 would lose some conviction in the immediate positive outlook of the move, but our conviction to buy into weakness would remain intact now until a breach of the multi-week uptrend and support of $1693. We expect further multi-year highs above $1764 towards $1800 in due course.