The market continues to settle after the huge correction. Building a run of higher lows and higher highs is important for a recovery. We are still cautious given the recent rise in bond yields and the potential for an announcement on US fiscal support which could generate another shakeout. However, looking beyond the near term volatility, we see this weakness has been another opportunity to add to medium-term longs.
The dust is settling on gold after the huge shakeout which drove the market -10% lower. One of the key factors has been the big jump in Treasury yields. However, it is interesting to see that in the last couple of days, the rise in yields has also come with support for gold. This is pulling the correlation sharply in a positive direction (or at least less strongly negative).
The issue becomes whether this rise in yields will continue. Part of the reason that yields have risen so sharply this week has come from a massive bond issuance in longer-dated duration Treasuries. For the US 10 year (which we take as our correlation trade), there has been $38bn of 10 year debt issued on Wednesday (in addition to $26bn of 30 year debt issued yesterday). A huge increase in bond supply reduces the price and increases the yield. It is interesting to see that the 10 year yield is actually starting to slip lower once more this morning, or at least stabilise.
We still see the risk that yields pull higher on the announcement of a US fiscal support package, but this could be some way off still. Apparently the two sides are at least $1 trillion apart, which is a huge gap.
The drag on the political agreement for a fiscal package has also meant that the attempt at a dollar rally has struggled in recent sessions. We see that 94.00 resistance on Dollar Index remains intact. This is also playing into the support that gold has found in the past 48 hours.
We are growing in confidence that the big sell-off on gold may have largely played out. It is possible that a further slide could be seen on the announcement of the US fiscal support package. However, if the longs can ride out the volatility, we would expect that gold will begin to move higher once more.
We still believe that fundamentals on gold will underpin for a stronger gold price in the medium to long term. 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 supported weakness.
- $1937 – intraday low 13the August
- $1921 – intraday low, 13th August
- $1906 – intraday low 12th August low
- $1966 – 13th August high
- $1980 – old late July consolidation range high (resistance band $1980/$1984)
- $2000 – psychological
For a while now, we have been looking to use a near term correction on gold to be a medium term buying opportunity. After the 10% correction in the past week, the move appears to be settling down now. Subsequently, we believe that this run higher is likely to be getting back on track once more. The technicals are stabilising, with RSI around 50 and Stochastics also beginning to tick higher, although the MACD lines which are more of a medium term indicator, are still in retreat.
The main caveat for us comes not from technicals, but of how the market would respond to a US fiscal support package. This is likely to cause some near term volatility again if/when announced. In its absence though, the gold bulls are starting to get going again.
The hourly chart shows improvement through higher lows and higher highs in the past 48 hours. Following initial consideration of resistance at $1940/$1949, the market is looking to pull higher again, and to use this as a basis of support now. Hourly momentum indicators are no longer corrective and are at least taking a more neutral configuration. It means that support initially at $1920 but more importantly at $1906 is growing in importance now as a near term gauge. Yesterday’s high of $1965 is an initial barrier this morning, but a retest of 1980/$1984 (old consolidation resistance) could now be seen. We cannot rule out another lurch lower on the announcement of a US fiscal support package, but it looks to be that this weakness is a chance to buy and the market is looking for medium-term opportunities now.
STRATEGY: The market is beginning to look more composed after the big shakeout. Whilst we cannot rule out another decline, we believe that the medium-term buying opportunity we have been waiting for is being built. Holding above $1920 will help to build confidence again If gold can ride out any near term volatility from the US fiscal support, we are confident of renewed medium-term upside once more.