A sharp 10% correction on gold is looking to stabilise as the dust begins to settle. There is still some uncertainty over the near term outlook, but if support can begin to build, then the bulls should begin to resume control of the market. Moves on gold are still strongly correlated to moves on Treasury yields and the dollar. Once these near term unwinds have played out, we view this correction on gold as a chance to buy for renewed upside potential.
The decisive improvement in Treasury yields has pulled gold sharply lower in recent sessions. Interestingly, the move in yields has begun to falter and subsequently gold is stabilising. Technicals on gold are beginning to settle down, but we are still concerned that there could be further traction higher in yields if US politicians can agree on a sizeable fiscal support package. Fiscal support that helps to bolster the economy and improve the prospect of recovery from eh pandemic shutdown would improve market confidence and should pull Treasury yields higher. Given the negative correlation with gold, this could still mean the downside pressure on gold is not yet over.
Below we can see that a rebound of +19 basis points int he 10 year yield has driven gold as much as -10% lower. The yield has slipped back around 4bps since that high of 0.69% and gold is stabilising. However, if agreement can be struck in Congress over a fiscal support package, then yields could pull higher again. This could induce another leg lower on gold, potentially back towards the mid-$1800s again.
How the dollar responds will also be interesting. A pick up in the Dollar Index has stuttered in the last couple of days, but the correlation with gold remains very strong. We still see 94.0 as key resistance for the dollar (equates with a move below $1.1695 on EUR/USD and a move below $1.2980 on Cable). A dollar recovery is struggling for traction and moving forward for the rest of 2020 we see that any near term dollar strength would simply be another chance to sell.
We expect that this move lower on gold is a chance to buy. Whilst further near term volatility cannot be ruled out (and another leg lower on gold could come on the announcement of a fiscal stimulus package), we would expect gold to resume its bull run higher in due course.
We still believe that fundamentals on gold will underpin for a stronger gold price in the medium to long term. 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 supported weakness.
- $1921 – intraday low, 13th August
- $1906 – intraday low 12th August low
- $1863 – 12th August low
- $1941 – intraday high 12th August ($1940/$1941 now a pivot)
- $1949 – 12th August high
- $1980 – old late July consolidation range high
When we discussed the rising two-month uptrend (currently $1872) we never imagined that the market would retrace the bull move so quickly. Over the course of just over three sessions, gold retreated over -$200, almost exactly -10%. Our view has been for a while now that once the corrective move has shaken out the weak bulls, that gold would have another strong opportunity to buy.
It will be in the next session or so whether we can ascertain if the overbought exuberance has been removed or whether there is more downside to come. With all the volatility of yesterday’s session forming a small-bodied candlestick (along with huge upper and lower shadows), it is still too early to say. Daily MACD and Stochastics are falling, but interestingly, the RSI has begun to stabilise around 50 as the market has edged higher this morning.
The importance of the old $1940 consolidation level is also growing, as a band of resistance $1940/$1949 has developed in the past 24 hours. As the market settles down and the bulls can begin to pull higher through this resistance, then the outlook will begin to improve once more. It is interesting to see the hourly RSI also still under 60 and, for the bulls, that needs to change. There is a reaction low at $1906 that now needs to hold too as support.
STRATEGY: The aggressive sell-off still needs to settle down and we need to see more evidence of support before looking to buy once more. However, once we are confident that this corrective phase has played out we would look to use the weakness as another medium-term opportunity to buy.