A pullback into support is a chance to buy. We continue to back the breakout on gold, and see the near term retracement as an opportunity. A buy zone between $1764/$1789 is in place now, with a five week uptrend also supportive. Although gold is slipping back with a dollar strengthening today, we see this as a short term move. Falling yields should help to underpin further gold upside.
We have been noting that the breakout on gold has come as the dollar has been weakening recently. It comes as little real surprise that as a dollar rebound has set in in the past 24 hours, we see that the gold breakout has seen a degree of retracement. However, we expect that this dollar strength will tend to be short lived in the coming weeks.
Below we show how the negative correlation between the dollar and gold is strengthening.
However, this also comes at a time where Treasury yields are also testing lower. Given the strong current, and historic, negative correlation between gold and yields, this should prevent any sizeable correction on gold and underpin support for gold moving forward.
Our long term position on gold has been bullish for a while. It has taken some time to break higher from the medium term range, and now we see a decisive emerging. An ongoing dollar weakness in Q3 would certainly help to sustain gold at these elevated levels and perhaps test the $1920 all time high in due course. Fundamentals underpin and point to continued support for gold. 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 weakness.
- $1795 – low 9th July, intraday low 10th July
- $1789 – 1st July high
- $1770 – 6th July low
- $1817 – 8th July high, currently the multi-year high
- $1820 – conservative implied target from April to June range
- $1858 – a more bullish upside projection target
After the breakout comes the pullback. This seems to be a feature of breakouts on gold over recent months. We do see that the breakout this time has been built on firmer positive ground, but it will be interesting to see just how far this unwind now goes.
A mild negative candlestick yesterday has taken some of the sheen off the move to multi-year highs, but for now this seems likely to provide the next opportunity to buy. The support of the latest breakout is at $1789, whilst support of a five week uptrend is at $1783 today. This is a good basis for the bulls to work with as the market slips a shade further this morning. We look for buying opportunities now between the $1764 and $1789 old breakouts. This is now a zone of underlying demand.
During previous breakouts, momentum indicators have had questionable strength. However, this time we see RSI pulling back from the 70s, MACD lines rising for the past three weeks and Stochastics strongly configured. A near term unwind would help to renew upside potential and should (at this stage) be viewed as a positive move. Below $1764 would be disappointing for the bulls now, whilst below $1744 would start to become a decisive bull failure. For now, we see this as an opportunity for the bulls.
STRATEGY: We are happy to back the run higher but would look to use near term weakness towards the previous breakouts which are a support band between $1764/$1789 as an opportunity to buy for continued upside. A target range between $1820/$1858 is implied. Given the strength of the breakout, below $1744 would be a shift of outlook.