Profit-taking threatens gold bulls but weakness remains an opportunity

Trading outlook:

We see some risk of near term profit-taking on gold on a risk rally. Technicals reflect this, but we continue to see gold as a medium-term buy into near term weakness.

Fundamentals/Newsflow

With broad market volatility and a risk relief rally today, gold is beginning to see some profit-taking. We continue to view the relationship between the US 10 year Treasury yield and the gold price as a strong correlation. Our chart below shows the inverted yield is a stronger mover but it does give a strong indication to moves on gold (leaving aside the margin call sell-off on gold two weeks ago). As such with the US yield increasing, gold is falling. As such the medium-term gold rally will be a function of the market outlook on US Treasury yields.

Fundamentally we remain medium-term bullish, due to the increasingly dovish interest rate expectations and increasingly negative real yields. We see any near term weakness therefore as a chance to buy whilst markets remain spooked by Coronavirus.

Support

• $1647 – 6^th March low
• $1642 – 23.6% Fibonacci retracement of $1445/$1702
• $1626 – 3^rd March intraday low

Resistance 

• $1671 – intraday high 10^th March
• $1685 – 9^th March intraday high
• $1702 – 9^th March high

Technical Analysis

On a day where volatility reached levels not seen for years and fear gauges went through the roof, gold posted a negative candle. Whilst the close was higher, this move raised a few eyebrows. The uncertainty levels over the strength of the bulls grew more overnight as gold has started to pull back. We began to look into the prospect of a small reversal pattern on the hourly chart yesterday, this pattern has completed overnight. A small head and shoulders top below $1660 (an old resistance) suggests that there could now be a retracement in the offing. A corrective move of around $40 is the implied target. This would leave gold around $1620, just above the old $1611 breakout. There are little retracement signals building on the daily momentum, with Stochastics threatening to cross lower and RSI already rolling over. This would still be just a near term pullback and we would view it as another chance to buy on a medium-term basis. The three-month uptrend comes in around $1600 today. With the recalculation of the Fibonacci retracements (of the now $1445/$1702 rally) we see $1641 as the first gauge of support, being the 23.6% Fibonacci retracement. To hang on to their gains, the bulls need to pull back above $1680/$1685 resistance built throughout yesterday’s session.