We remain cautious on near term longs as the consolidation continues to grow and as gold has formed a short term trading range between $1585/$1642. We are still bullish medium to long term and see near term corrections as a chance to buy.
Fundamental drivers on gold have been fairly mixed in recent sessions and this is engendering a near term range on gold. Newsflow of the spread of Coronavirus continues to worsen which should be positive for gold (as a safe haven) under normal market conditions. However, correlations for gold across equities, the dollar and US Treasury yields are throwing out mixed signals.
The normal correlation between gold and equities is negative (negative equities is positive for gold), but in recent weeks amidst the huge margin driven selling pressure on portfolios, gold has become positively correlated (as gold has been sold in liquidations). So, the rebound on equities has been a positive for gold recently. This rebound on equities has turned into a mixed outlook in recent sessions and gold has been ranging.
It is also notable that the correlation between gold and US dollar has been less well-defined in recent sessions. However, we see the correlation remains strongly negative (c. -0.7) and with the dollar starting to pick up slightly, this is threatening to weigh on the gold price.
However, there is another counterbalance on gold, where the negative correlation between gold and Treasury yields is also a factor. Treasury yields are beginning to fall again (should be gold supportive under the usual safe haven trading links). The correlation which had been questioned during the middle of March is also now getting back on track, and this is helping to support gold.
Subsequently, there are lots of mixed signals for gold in its traditional correlations, hence a ranging outlook developing. However, looking longer term, once markets begin to settle, with yields expected to remain depressed on the massive easing of monetary policy, we expect gold to remain supported and medium to long term positive.
- $1604 – 38.2% Fibonacci retracement of $1445/$1702 ($1606 was 30th March low)
- $1592 – 26th March low
- $1585 – 25th March low (and 24th March intraday low / pivot)
- $1634 – 30th March high
- $1642 – 26th March high, also 23.6% Fibonacci retracement of $1445/$1702
- $1670 – 11th March high
Gold continues to build a near term consolidation. There are increasing conflicting influences on the near term outlook (from a fundamental perspective) and this is playing out on the technicals as a consolidation range has formed between $1585 and $1642. Just in the past few sessions, the Fibonacci retracements (of the $1445/$1702 rally) at 23.6% (around $1642) and 38.2% (around $1604) are coming into play as near term gauges of sentiment for the consolidation. Momentum of last week’s bull rally has certainly tailed off in recent sessions, although there is still a positive bias to the outlook. The RSI is settled in the mid-50s, whilst MACD and Stochastics are still rising. We see hourly indicators reflecting this consolidation now (hourly RSI specifically between 40/60 is ranging). This is becoming a market in need of direction now as these mixed signals take hold. Something to also keep an eye on, is that where previously the daily highs were successively higher, there has now been two successive lower highs and resistance around $1634 to overcome. Initial resistance on the hourly chart is at $1627. Below $1604/$1606 support opens the key near term support of $1585.