Gold performance has suffered recently amidst the acceleration of the risk rally, in a move which has turned the outlook into a medium term range play. Subsequently, we are neutral amidst an uncertain near term outlook. Near term resistance of a pivot band $1720/$1725 and support at $1689 are becoming the levels to watch for direction.
Gold bulls seem to be stuck between a rock and a hard place right now. Historic negative correlations with bond yields and the dollar are having a counter-balance impact on the gold price (as the dollar is being treated as a key safe haven right now).
The historic 12 month correlations suggest that the relationship with Treasury yields (the 10 year correlation is currently -0.5) is more of an influence on gold than that of thee dollar (at -0.22).
The dollar has broken down recently (which should be gold supportive) but this is also coming as Treasury yields have broken higher (which is a gold negative factor).
As such it should come as little surprise that we find gold increasingly stuck in a trading range. We may begin go find some more decisive direction on gold if there is a significant risk correction again, which weighs on yields and pulls the dollar higher once more. However, we expect that yields will struggle to sustain too much traction in either direction (with the Fed such a huge guaranteed buyer in the market this will dampen moves on yields).
The relative performance (measured versus USD) chart shows gold still languishing down the bottom compared to major currencies and silver. As risk appetite roars on and almost everything else is rallying hard against the dollar, gold is struggling.
However, looking for medium to longer term, we see the building blocks for upside on gold. Yields likely to remain low or falling over the medium to longer term (still the potential for yield curve control by the Fed). We also see that once this huge risk rally has played out, a degree of reality will return to financial markets which will see economic hardship to persist and this should be gold supportive.
All considered, we continue to view near term price weakness as an opportunity to add to longer term positions. It is just the path to get there (the near term outlook) will be choppy and difficult to navigate.
- $1689 – 3rd June low
- $1681 – 6th May low
- $1668 – 1st May low
- $17220/$1725 – near term pivot band ($1721 was 4th June high)
- $1744 – 1st June high
- $1753 – 20th May high
Following the breakdown of the 8 week uptrend and the support at $1693 we are now neutral on gold. Noting that the bulls are no longer in control, we see that upside traction is difficult to sustain and in the past couple of weeks the negative candles are more of a dominant force on the daily chart. Momentum indicators sliding back are a reflection of this. The RSI went below 50 for the first time since March this week, whilst MACD lines continue to fall and Stochastics are also their lowest since March.
We have recently been talking about the $1722 old May pivot being a gauge for the market, and it was interesting to see yesterday’s rebound faltering at $1721 (the hourly chart shows a band of resistance now $1720/$1725). We believe that the price action of the last two weeks suggests that gold has developed into a trading range now, of around $100 between $1660/$1764. Effectively then, at current levels, the market is trading around the mid-point of this range.
On the hourly chart we continue to note the slightly corrective bias that is in place, with the hourly RSI stuck under 60, whilst MACD lines have crossed lower around neutral in the wake of the rebound failure at $1721. The market is in more of a choppy mid-range phase now. A negative candle posted today will continue the near term negative bias and increase pressure on $1689 (Wednesday’s low). If breached then it would suggest a negative drift back towards the $1660/$1668 range support band. Closing back above $1722 begins to edge more of an improving bias once more, but the market needs a pull above $1744 to end a corrective run of lower highs.
STRATEGY: Having broken the reaction low at $1693, the near to medium term outlook has become increasingly uncertain. As such, we are now turn neutral and look to play gold as more of a medium term trading range between $1660/$1764. Although we continue to look for a long term move higher, the uncertainty will make for a difficult near term trading outlook.