With a mixed read from fundamental correlations, the outlook for gold continues to lack real direction. Yesterday’s rebound leaves the market once more around the middle of the $1660/$1764 trading range. With a near term negative trading bias still, rallies within the range look to be selling opportunities. We look for another lower high between $1700/$1720.
What would tend to be considered to be the more traditional gold correlations have taken hold once more in recent sessions. Negative correlations to moves on Treasury yields and equities are aligned to the traditional risk-on/risk-off market moves. However, this comes at a time where the US dollar is acting very much as a safe haven asset. With gold also trading as a safe haven, it means that moves for gold and the dollar have become more positively correlated in recent weeks.
Below we see the increasingly negative correlation between gold and the US 10 year Treasury yield (as can be expected).
Also this chart shows how the correlation with US equities (we take the E-mini S&P futures as the gauge) have become increasingly negatively correlated. Although historically, the correlation is very weak (around zero over the past 12 months), right now this is a clear influence on gold.
However, moves on the dollar appear to be more of a balancing factor for gold right now. Note the big breakdown on the dollar (coming at the time of a break higher on US yields too) but not seen in gold (which continues to range).
This all balances out to a continuation of a struggle for gold to perform well during this time of risk recovery. Hence we see the trading range forming on gold over the medium term.
We taken in conjunction with our still positive longer term outlook on gold, we would still favour an eventual break higher on gold. Near to medium term weakness is still still views as an opportunity to add to longer term positions. It is just the path to get there (the choppy near term outlook) will be difficult to navigate.
- $1685 – intraday low, 8th June
- $1670 – 5th June low
- $1668 – 1st May low
- $1705 – intraday high, 9th June
- $1720/$1725 – near term pivot band ($1721 was 4th June high)
- $1744 – 1st June high
Today’s session could be a very important one for gold. Price action has turned the positive outlook sour in recent weeks. The dominance of strong negative candlesticks is overpowering the attempted recoveries. This is reflected in the consistent failing of momentum as daily RSI, MACD and Stochastics track a path lower.
Yesterday’s latest rebound brings the market to another near term crossroads. Since topping out at $1764, the rebound candlesticks have been treated as another chance to sell as the market sets towards a test of the medium term range lows $1660/$1670. Will this latest bounce be once more treated as another selling opportunity?
The signals look worrying on the hourly chart this morning. The hourly RSI is again faltering around the 60 level, whilst Stochastics are already pulling lower and MACD lines are threatening another bear cross around neutral. The bulls need to climb above the resistance band $1720/$1725 to start to change this outlook of selling into strength, however, the market now seems to be faltering around $1700 (where previously this was seen as a basis of support). Back under $1685 today would really put pressure back on $1670 support.
STRATEGY: Look to play the $1660/$1764 range. A near term corrective outlook points towards using failing rallies as a chance to sell for a test of the $1660/$1670 support band. A decisive move above $1725 would defer and change the near term outlook once more. We continue to expect gold to lack conviction on a near to medium term basis. Our long term bullish outlook remains in place, but the path for further gains will be difficult.