There are ongoing signs that gold is beginning to revert towards more of a safe haven asset play once more, but for now this means that a near term technical correction continues. However, this short trend lower within a trading range between $1660/$1746 is expected to be an opportunity to buy for the next bull leg higher. There is good support around $1660/$1668.
The latest Q1 2020 report for gold demand from the World Gold Council reflected a few interesting fundamental factors impacting gold right now. Here are the highlights:
Looking at these in turn:
- Gold ETFs with huge inflows – BULLISH
- Demand for jewellery has fallen sharply due to the pandemic. However this can be expected to recover steadily as the world comes out of lockdown – SHOULD BE LONG TERM SUPPORTIVE
- Central bank purchases will be falling after Russia announced an end to its long term buying programme – NEGATIVE FOR GOLD.
- Total Q1 supply fell amidst the lockdowns shutting mines and impacting on recycling, but once more this is likely to recover in due course – A NEAR TERM POSITIVE.
All in all we see mixed messages coming out of the report, but as we can see from the bar chart below, the demand for jewellery and ETFs are a massive bulk of overall demand and this should be gold supportive in the long run.
For now though, gold is corrective still. Notice how gold (and silver) are the big underperformers versus the dollar of the past three weeks.
We continue to see gold developing into a safe haven play on its correlations too. The growing negative alignment with moves on US Treasury yields reflects this.
We continue to expect yields will remain low with the hugely dovish policy of major central banks (and potentially even more dovish moves to come from the Fed (and as of this morning, the Bank of England too). This will also be dollar negative which is a positive impact on gold in the long run. If the Fed moves to yield curve control, this will further underpin gold. We therefore see near term price weakness as a chance to buy gold.
- $1681 – 6th May low and 7th May intraday low
- $1668 – 1st May low
- $1660 – 21st April low
- $1702 – old pivot
- $1711 – 4th May high
- $1721 – 30th April high
Gold continues its near term slip back from its highs. A two week corrective downtrend that links the lower highs of the last couple of weeks has weighed on gold to yesterday form a decisive negative candlestick. This now brings gold back towards the lows of the range of the past few weeks around $1660/$1668. We continue to see this kind of near term move as being another chance to buy.
Gold remains strongly configured on a medium to longer term basis and an orderly decline (similar to the one it is currently experiencing) is expected the be the source of the next buying opportunity. For now the mini trend is lower though and there is still room for further unwind. However, the 23.6% Fibonacci retracement (of the $1450/$1746 rally) sits at $1676 and the mid to late April lows of $1660/$1668 are close too. This is an area where we expect a near term correction will begin to form support. The old breakout level of $1640 is a good gauge of important support now, and the bulls would not want to see the market falling below here (the 38.2% Fib is also at $1633).
The hourly chart reflects this near term correction well and faltering under $1690 (which has become a near term pivot) suggests there is further downside potential near term. Howveer, we expect this to be short lived. The downtrend sits around $1704 today and there is initial resistance at $1711 which a break above would be a trigger for renewed upside momentum once more. A push towards the range highs $1738/$1746 and beyond is expected in due course.
STRATEGY: We view the near term weakness on gold to be an opportunity to buy. We add to positions around the lows of the recent range (of $1660/$1748), with good support in the band $1660/$1668. We still see medium term weakness as a chance to buy for new multi-year highs in due course. A close below $1636/$1640 support defers.