Our caution with the bull run was well-founded as near term profit-taking has set in. We see this as just an unwind of the bull run and once more will be a source of the next opportunity to buy.
We continue to see gold reacting to near term newsflow on COVID-19. With no further deterioration or head-line grabbing events overnight, there is a degree of profit-taking that has taken hold.
There is a key negative correlation between the US 10 year Treasury yield and performance on gold. As the 10-year yield has fallen hard recently, gold has shot higher. This morning we see a mild retracement on the 10-year yield, but nothing too substantial, this is pulling gold back. The move on bond yields will be a factor in the move on gold.
The next level of note on the US 10 year yield is at 1.321% July 2016 low, which is the lowest recorded level in modern history.
This correlation between gold and the 10 year Treasury yield is shown below (with the UST yield inverted).
- $1633 – intraday low, 25th February
- $1623 – 20th February high
- $1611 – 8th January high
- $1660 – intraday high, 25th February
- $1688 – 24th February high
- $1695 – January 2013 high
There are signs of profit-taking on gold this morning. We discussed the importance of yesterday’s gap at $1649 and how the bulls would respond. This gap has now been filled this morning, and if the market closes at current levels, given the strength of the negative candle it would suggest that the bull run is over, at least for now. We note the January bull run, which culminated in a -$75 unwind from the high. So far the market has given back over -$50 from the $1688 high (the highest level on gold since January 2013). Momentum indicators are reacting too. The RSI crossing back under 70 is a classic exhaustion signal for the bull run. The Stochastics bear cross (not yet confirmed) is also a sign of growing unwind. The hourly chart indicators show a renewed pullback move this morning after overnight consolidation. This is leaving resistance at $1658/$1662. The initial support is at $1623, but the first real support is at the $1611 old key breakout.