Correlations on gold with equities and the dollar suggest that the immediate upside potential of the bull run may be at risk. However, we retain a bullish bias for the breakout whilst supported above $1702 and longs would see renewed upside momentum above $1727/$1730. We continue to see weakness as a medium term buying opportunity.
Gold broke out this week and remains technically strong (see below), however, there is a consolidation that has formed in the past couple of sessions. Fundamentals also show some interesting correlations that suggest if a risk sell-off resumes, the near term bull run on gold could be at risk.
In the past week, the negative correlation with the dollar has re-asserted. If a dollar recovery takes off, this could weigh on gold near term.
Also there is still a very positive (albeit abnormal) correlation with equities. US futures (the E-mini S&P contract) and gold have been moving very closely with each other (at least on a directional basis). There are signs that the bull run on equities is creaking. We still believe that this correlation is only a near term phenomenon and that this is likely to still be a function of elevated volatility (VIX still above 40), but for now persists.
Gold is also lacking a real correlation with Treasury yields still in recent weeks, suggesting that gold continues to play not necessarily as a safe haven (perhaps more of a standalone asset).
It will be interesting therefore, if there is a renewed (relatively controlled) equities decline (as opposed to a massive dump) how gold would respond. Would it find renewed safe haven flow?
Realigning our “rebasing” chart of gold versus major currency performance of the past month, we see to see in addition to the bull run on silver, gold is still a standout performer. In fact as the dollar rally (and re-emergence of risk aversion) has begun to creep back in again, we see gold performing better than silver again. As the dollar has started to perform better in the past couple of sessions, gold is holding up relatively well (even if it is marginally off versus the dollar in the past couple of sessions).
We see the risk of a mild correction is still there for gold, but we would still see it 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.
- $1706 – near term potential top neckline (15th April low)
- $1702 – old March key high – breakout support
- $1671 – near term pivot, 7th April high
- $1727 – intraday high 15th April
- $1746 – 14th April high
- $1754 – November 2012 high
We have become more cautious of the breakout on gold in the past 24 hours. The bulls will certainly point to the fact that once more the breakout support (this time around $1702) is holding (as previous breakouts have around $1640 and $1671). Our bias is still positive, with the uptrend support at $1688 today and positively configured momentum. However, there is still a risk that the near term move loses impetus, with the daily Stochastics rolling over and RSI stalling in the mid-60s.
However, we remain encouraged by the holding of support at $1702, but the hourly chart shows that this is a market which is still close to a near term correction. The formation of what could be a small head and shoulders top over recent sessions (neckline support at $1706) needs watching, as does hourly RSI which is hanging on to 40, whilst hourly MACD lines have just edged below neutral. Failures of these conditions would open for a corrective move. For us this would be a close below $1702 which would likely see a pullback into the $1670s.
We would still be supportive of buying into any weakness, but for now we are cautious of gold breaking decisively higher this morning. We continue to believe that gold will see further new multi-year highs above Tuesday’s $1746, but prefer to see how this near term consolidation plays out. The previous two consolidations post a breakout has resulted in another upside break and continuation of the uptrend (see the breakout above $1642), and this is still our preferred position. A decisive move above $1727/$1730 would be the trigger for the bulls to regain momentum and effectively re-open the upside for $1646 and beyond.