A lack of conviction has taken over the medium term trading range between $1660/$1764 with a spate of small bodied daily candlesticks. Both technical and fundamental signals reflect uncertainty, so it is difficult to take much of a view on gold right now. Despite this, we continue to believe the next key break will be to the upside, but for now are cautious over the near term trading prospects for gold.
Broad markets are in a phase of uncertainty and lack conviction. The same can be considered for gold. The correlations that traditionally drive gold are not conducive to a near term breakout on gold right now and for this reason we would view near term positive moves with scepticism.
Gold has a long term negative correlation with the dollar. The correlation indicator has been swinging in that direction over the past couple of weeks as the dollar has found some support but gold has just slipped slightly. Looking further out, we still expect a weaker dollar through 2020, which points to gold higher. However, for now this is a waiting game.
Treasury yields also have a negative correlation with gold (we look at the US 10 year yield here). Falling yields tends to be risk negative and gold would historically be supported by this (gold being seen as a safe haven play). In the past couple of sessions, this relationship has tended not to be so strong, but broadly it rings true over time. So with Treasury yields stuck ranging for the medium term, we see a similar outlook for gold. The traction that gold would need to find for a decisive upside break may not come from yields (which although are likely to remain stuck low, are unlikely to drive sharply lower from here).
A negative correlation between gold and equities has also developed in recent weeks (we take the S&P futures here as the gauge). This should suggest that a correction on equities would be supportive for gold. Historically, this correlation lacks conviction and needs to be treated with caution. The correlations with yields (historically strong) and the dollar tend to be more reliable gauges over the medium term.
It is interesting though to see the split of performance in majors versus the dollar in the past two weeks. Look at the higher risk, commodity currencies clustered at the bottom of the performance graph (along with sterling). Also note the yen, gold and also to a slightly lesser extent Swiss franc which are all considered safe haven assets, all performing better over the past couple of weeks.
For now, gold is trading within a range, but we do still ultimately expect further upside in the longer term towards $1800 to be seen in due course. However the path to get there, with a choppy near term outlook, could be tricky to navigate.
- $1717 – 18th June low
- $1712 – 17th June low
- $1704 – 15th June low
- $1736 – 18th June high
- $1744 – 1st June high
- $1754 – 20th May high
The consolidation on gold continues. The early part of this week had started to see a shade of downside bias, however, the bulls were consistently happy to support breaches of $1720 and close the market back above again. However, when this turned into a move to the upside yesterday, there was a bull failure at $1736 and another very small bodied candlestick reflecting the lack of conviction in the market right now. The conclusion to be taken is that there is uncertainty surrounding the outlook for gold right now.
Daily momentum indicators have very much flattened off over the past week and this is a market looking for a catalyst now. The market is beginning to tick higher again early this morning, but we do not see reason to trust this move at this stage. Intraday rallies have faded between $1730/$1736 throughout the past week.
We still hold the view that gold is trading within a medium term range between $1660/$1764 and that there will be an upside break in due course. However, unless there is a game changing fundamental event as a catalyst, we see an upside would be sticky and difficult to navigate. Initial support at $1712 and $1704.
STRATEGY: As another rally within the medium term $1660/$1764 range has failed, the outlook has all but been neutralised once more. The time horizon for trading gold seems to be increasingly short term before retracements set in. Latterly we see intraday weakness into $1700/$1720 being supported. We still favour a long term breakout higher in due course and closing decisive above $1744 would suggest the bulls are finally preparing for a breakout. Below $1660 would be a key deterioration.