With traditional correlations fairly weak currently, technical indicators seem to be driving gold for now. The near term corrective move is taking hold amid a building run of lower highs and lower lows. We are cautious for further downside potential whilst this move plays out, although we will be looking for renewed buy signals to be ready for the next medium term leg higher.
The downside move on gold seems to be fairly technically driven. There is little real driving force behind its traditional correlations (of the Dollar, Treasury yields and equities).
Gold is falling as the dollar has had mixed performance on Friday and this has continued today.
Gold has also fallen as US equities have broken out. This is a departure from what has recently been a positive correlation between gold and the E-mini S&P futures. It could be the start of a return to a more normal negative correlation, or it could be negative for equities. Right now it is too early to say.
The 10 year US Treasury yield direction is having little impact on the direction of gold for now.
Finally to give perspective, we see that the strong relative performance of gold in recent weeks is decisively turning lower. Today as other markets are still holding up relatively well versus USD, gold is again in retreat. Even the safe haven yen (which gold could be said to have a similar bias to) has been holding up well in consolidation as gold has fallen.
This all suggests that gold is trading fairly independently from other assets for now and this should help technical analysis be a driver.
Even though the slide back in price has begun, we see the risk is still only of a near term correction which we would see as a chance to buy. WE REMAIN MEDIUM TERM BULLISH ON GOLD. With real yields expected to remain low and negative with the massive easing of monetary policy, we expect gold to remain supported.
- $1671 – near term pivot, 7th April high
- $1640 – 7th and 8th April lows
- $1625 – 3rd April high – old near term breakout
- $1684 – intraday high 20th April
- $1690 – intraday high 20th April
- $1702 – old March key high – pivot
Having broken the support of the breakout at $1702, the corrective momentum on gold continues to build. A decisive negative candle confirmed a broken uptrend and a near term retreat for gold. The corrective candles on the daily chart are beginning to rack up now, and once more this morning, we see intraday gains being sold into.
The first key test for the bulls to defend will be the support of the old breakout at $1671. This became a pivot in early April and is under pressure this morning. A closing breach of this $1671 support would be a disappointment for the bulls and open the next pivot around $1640. The hourly chart shows a small top pattern completed below $1706 which implies around -$40 of corrective target (c. $1666), so this near term move still has downside potential. Hourly momentum implies a corrective bias, but without significant bearish momentum building up yet. The hourly RSI still holding above 30 reflects this.
However, we see this just as a question of how far the corrective move goes before support kicks in for the next bull leg. We continue to view these near term corrections as a chance for medium term buying opportunities. Given the neat term top target, $1671 support could well be breached today, but whilst $1640 holds we retain a fairly positive view of this move still. The breakdown at $1702 is now resistance overhead.