Trading outlook:
The gold bull run continues to push higher as new all-time highs are posted on a daily basis now. The weakness of the dollar and falling bond yields remain a key source of the move. Batting against this bull run is incredibly difficult but with the market so stretched, at some stage there will be some sort of corrective move. We continue to look for signals of exhaustion. On the technicals, there are hints of negative divergences forming. Furthermore, could the fundamentals signal a turn? Nonfarm Payrolls today and more pertinently newsflow on US fiscal support need to be watched.
Fundamentals/Newsflow
The gold bull run continues. US Treasury yields remains under pressure (with a “bear flattening” of the yield curve) and the US dollar is under selling pressure. Although the dollar has ticked slightly higher this morning, these current trends are well set. The negative correlations that gold has with both the US 10 year Treasury yield and the US dollar also remain extremely strong.
We are still looking for the triggers that could drive a turnaround. And so the major events on the immediate horizon are Nonfarm Payrolls and US fiscal support. How the market responds to payrolls today could be an interesting read, but it is our expectation that the announcement of US fiscal support could be a near term inflection point for yields, the dollar and subsequently gold.
Expectations for Nonfarm Payrolls today look to be a little punchy. It is our expectation that there could be a negative surprise from the +1.600m jobs growth expected. How the market responds to this could be intriguing. A sizeable negative surprise (similar to the ADP miss) could be USD negative and risk negative (pulling yields lower). This would likely drive gold higher again. However, could this also be a move for a final blowout top on gold?
The reason for the blowout, could be that US fiscal support is needed and is surely coming soon. A downside surprise on payrolls could be the trigger for compromise needed to get consensus on the fiscal package. We believe that this would be then positive for Treasury yields, and actually begin to pull the dollar higher (Treasury yields and the dollar still have a positive correlation). We then believe that this would be the trigger to lock in profits on gold long positions.
As for levels to watch. For the Dollar Index, 94.00 is a key level to watch (translates roughly to 1.1700 on EUR/USD. An unwind on Dollar Index into the 94.63/95.70 resistance band would be possible.
For the US 10 year yield, we are watching 0.572% as a barrier. A move above would suggest the yield bouncing towards 0.63% again.
If those unwinding moves kick in on the dollar and yields, that would probably see gold pulling back below $2000 and into the band $1940/$1980. This would be a good/healthy correction to unwind some of the exuberance.
Gold remains extremely overbought on a near to medium term basis but in our view, once any near term corrective move/profit-taking plays out, we still believe that the fundamentals on gold will underpin for a stronger gold price in the coming months. 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.
Support
- $2048 – intraday lows from 6th and 7th August
- $2029 – near term pivot band $2029/$2030
- $2009 – 5th August low
Resistance
- $2072 – 6th August high, currently the all-time high
Technical Analysis
Calling the top in a market that is so strong and continues to push ever higher into new high ground is a task fraught with difficulty. Aside from daily momentum indicators remaining incredibly strong, gold continues to post strong bull candle after strong bull candle. There is a degree of consolidation forming this morning, but this can often be seen in front of Nonfarm Payrolls.
The RSI is still at record levels in the high 80s, whilst there is nothing on daily MACD or Stochastics which suggests any slowing or impending reversal. However, there is no getting away from the fact that gold is extremely stretched and the risk of a significant correction (as the elastic snaps back) is mounting. There are signs of something brewing on the hourly chart though. We mentioned yesterday the development of small negative divergences on hourly momentum. These signals are growing, especially on hourly RSI where there has been a “failure swing”.
The initial support this morning at $2048 needs to be watched now. A mini top formation would form below $2048 and imply a test of the pivot at $2029 support. A move under $2029 would see corrective momentum growing. The overnight high of $2072 is now the all-time high and is initial resistance.
STRATEGY: The gold bull run is pushing new highs on a daily basis. With little resistance, further upside cannot be ruled out. However, we remain cautious and there are now hints of exhaustion that could generate profit-taking. These would grow under $2048 and more so on a decisive move under $2029. We would still see a correction into support being a near term move and to be another opportunity to buy.
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