As gold continues to trade as a higher risk asset (certainly compared to tradition), this morning’s continued pullback from multi-year highs is a warning for long positions, but for now we remain bullish for buying into weakness into the support around $1702.
Gold broke out yesterday. This move came with US dollar weakness (a normal correlation) but also amidst positive risk appetite (shown in the ongoing positive correlation between gold and US equity futures). Today we see these correlations still in place. Gold has fallen back as USD has rebounded and US equity futures have dropped. The big caveat to playing gold long remains a renewed sell-off on equities, which would pull gold lower.
For now, gold is not acting not as a safe haven play. Amidst risk aversion resurfacing to an extent this morning, US Treasury yields have fallen away and USD (still a safe haven play) has rallied as Treasuries and the dollar have been bought. However, gold has fallen. This suggests that either gold is trading in isolation and merely has seen some profit-taking today, or to trade it as a risk ass with a negative correlation to USD.
Looking on the relative performance chart (versus forex majors), gold we see gold has dropped back strongly today. Interestingly the higher risk majors (AUD and NZD) have also slipped strongly, whilst less so on JPY and CHF. Once more this plays into the notion that gold is acting as a higher risk asset than normal right now.
Despite this morning’s pullback and the fact that gold has been recently trading as much higher risk asset than normal, 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.
- $1702 – old March high – breakout support
- $1671 – near term pivot, 7th April high
- $1640 – breakout support, 7th April low
- $1727 – intraday high 15th April
- $1746 – 14th April high
- $1754 – November 2012 high
A strong breakout on gold continued to make multi-year highs yesterday and reflects the appetite that the market still has to buy gold. The run is flanked by a sharp uptrend of the past four weeks which comes in around $1675 today, but the run of four consecutive strong bull candles has accelerated the move higher. We have seen this type of bull run on gold on several occasions in the past few months and the move will usually culminate in a blowout candle as momentum becomes overstretched. The similar moves, of early January and late February turned when the RSI was high 70s/80s. So with RSI currently in the mid-60s, there is further upside potential in this bull run. Buying into intraday weakness has been a feature of this move, with the previous breakouts turning from old resistance into new support. Subsequently, we still see $1702 as a prime buying are as the market has turned back this morning. However, the market may not pullback that far, as on the hourly chart we see 40/50 on hourly RSI has been an area where the bulls have often supported intraday weakness. There has been a fly in the ointment this morning as negative divergences on hourly RSI, MACD and Stochastics with the latest breakout have weighed on the price. It hints at a slowing of momentum. Near erm support sits with the breakout at $1702/$1707 and a failure back under $1702 along with hourly RSI consistently under 40 would be a warning signal for the bulls. We are happy to buy into this pullback whilst the market is not posting bear signals below $1702 support. Initial resistance at $1746 is yesterday’s high, whilst beyond that, resistance from 2012 comes in at $1754 and an old key high at $1795. Below $1671 the bullish near term outlook is compromised.