The gold bull run is managing to hold back the profit-takers and $2000 is still possible, but the move is looking tired now. With a dollar rebound threatening, the key driving force behind the rally could be about to dissipate. However, we would still see any correction as a near term move before providing the next opportunity to buy.
Although gold has hit another all-time high (of $1984) this morning, there has been a minor slip back as the European session has taken over. This is coming as the dollar is threatening to rebound. The dollar has been under huge selling pressure in the past month and at some stage the likelihood is that there will be some element of retracement. This could be bad news for the gold bull run (at least in the near term).
Despite not doing a great deal in the FOMC meeting last week, the market seemed to take it that the Federal Reserve would be ready to make a dovish move in upcoming meetings (likely in September). Subsequently, yields continued to fall in a move that helps to sustain the gold bull run. On Friday, the US 10 year yield dropped below 0.54% (the old April low) to levels not seen since the March spike low.
However, the weakness of the US dollar seems to have been a key driver of the move on gold, and there are signs that the dollar is threatening a near term rebound. This would be near term negative for gold. Can this move take off? We believe that there would be a reaction if/when Congress agrees to the next round of US fiscal stimulus. This would likely induce a bounce on yields and the dollar too. It is at this stage when gold may would likely see a more sizable pullback than the one seen in the middle of last week.
We still see room for a rally on Dollar Index into the 94.63/95.70 band (back towards a multi month downtrend too). This could easily drag gold back below $1900 and perhaps into the mid-$1800s.
It looks like this is a difficult moment for the outlook on gold. The bulls are still happy to buy into new all-time highs, however, it is a move that increasingly looks stretched and the excuses to take profits are mounting. We have been cautious of chasing the bull run higher for several sessions, and believe that a correction is increasingly likely.
Despite this, we would expect that once any near term corrective moves play out and settle down, we still see fundamentals underpin a stronger gold price and point to continued support for gold. 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 weakness.
- $1960 – 31st July low
- $1940 – 30th July low
- $1907 – 28th July low
- $1984 – intraday high, 3rd August, currently the all-time high
- $2000 – psychological
With such an impressive run higher and momentum indicators still stretched to extreme levels, there are growing questions over just how far the gold rally can go. For now though, the bulls are resisting the temptation to take profits. Throughout last week, there was resistance hit at $1980, however, the all-time high has once more been extended this morning, hitting $1984 early today.
This is a difficult moment for the bulls, as there are hints of slowing momentum still on the hourly chart, but without any outright sell signals. Hourly MACD lines and Stochastics are less positively configured, but do not exhibit anything overtly corrective. There are support levels that are being left to take note of.
Friday’s initial low at $1960, whilst Thursday’s reaction low at $1940 is a more considerable higher low. If they begin to be broken then there is more reason for the bulls to be worried. For now though the bulls continue to defend well against potential profit taking and $2000 is still a realistic target.
STRATEGY: Despite a choppy few days for gold, so far we see that any significant profit taking has been kept at bay. There is still an appetite to buy gold and once more an all-time high this morning reflects this. A move towards $2000 cannot be ruled out therefore. However, this is an increasingly tired looking move. Below $1940 would now signal moves towards a correction, which would accelerate under $1907.