Gold has turned corrective as risk appetite has picked up again, suggesting that a safe haven bias is weighing on the price. With the gold bulls taking a step back, a near to medium term range has formed between $1660/$1646, with reaction around a pivot at $1702 increasingly a near term gauge.
We still see gold under near term corrective pressure as risk appetite picks up again today. There are signs that gold is beginning to develop more of a safe haven bias once more.
It was interesting to see early gold weakness unwind as equity markets fell away once more yesterday. The positive correlation with US futures has certainly begun to unwind and we expect it to continue to revert back towards the mean (which is a lack of correlation around zero) as equities volatility continues to fall back.
The US dollar has also been playing as a key safe haven play throughout the COVID-19 period. With gold losing its positive correlation versus equities, gold and the dollar have become more aligned again. In the long term as markets settle down, gold and the dollar should revert to being mildly negatively correlated. We continue to expect that as markets settle down and economic recovery picks up, the dollar will end up being an underperformer. This should help gold to perform well going forward (although unlikely to perform as well as risk recoveries).
US Treasury yields and gold have been a consistent negative correlation play over the past year. This is less evident on a near term basis though. The other factor to consider is that gold is consolidating in front of the Fed. If the FOMC does signal towards using yield curve control then this would be negative for yields and should be positive for gold in the medium to longer term.
Note on the relative performance (rebasing chart) that the higher risk Aussie is now beginning to overtake gold on performance relative to the dollar in April.
We are seeing gold struggle on a near term basis as its safe haven bias begins to return amidst a risk recovery. However we remain positive for the medium to longer term prospects for gold and see near term weakness still as a chance to buy gold. This could still be the early stages of a less decisive positive trend on a near to medium term outlook for gold. However, on a medium to long term basis, with real yields expected to remain low/negative and the massive easing of monetary policy, we expect gold to remain supported and to perform well.
- $1691 – near term pivot support, 28th April low
- $1678 – 22nd April low
- $1671 – old pivot
- $1713 – 28th and 29th April intraday highs
- $1717 – intraday high, 27th April
- $1728 – intraday high, 24th April
The positive outlook for gold has become far less secure in recent days. We turned neutral on gold yesterday as the pivot at $1702 was breached. A rally into the close left the door ajar for the rally, but with three negative daily candles now in a row, the corrective pressure is growing.
Momentum indicators are beginning to show the strain, with a bear cross on MACD lines and Stochastics also beginning to find traction lower. Once more we see the market gravitating around the $1702 this morning and although there has been no decisive breach, the hourly chart is beginning to show a more corrective configuration forming.
The market seems to be on hold to an extent today, with the FOMC meeting today (and arguably the ECB tomorrow too). For the bulls to get back on track, there needs to be a decisive closing move back above $1717. For now though, we are cautious over how this recent decline has developed within the context of what could still be considered a range formation between $1660/$1746. A breach of initial support at $1690 would open $1660/$1670 again.
STRATEGY: Breaching the $1702 pivot has neutralised the immediate bullish outlook and we now look to be trading a range between $1660/$1746. Consistent trading below $1702 weighs towards the support.