Trading outlook:
Breakout on gold! A decisive move above $1800 is holding this morning, with a weakening dollar helping to drive the move. Technicals remain strong for the move higher, whilst we see slightly extended momentum as a sign of conviction. Backing this move higher, we look to use any near term weakness as a chance to buy.
Fundamentals/Newsflow
The breakout on gold has really taken hold in the past few sessions as the dollar has weakened. The correlation between gold and the dollar has turned sharply negative in the past week. This suggests the dollar move is a key component of the breakout on gold. As Q3 develops we expect to see a developing theme of USD weakness and this should help to underpin gold moving higher.
We still see subdued Treasury yields as being supportive for gold moving forward. Yields do not seem to be playing too much of a role in this gold move at the moment. This may change in the weeks ahead, but for now though, the dollar is the driver of the gold move.
Relative performance of everything in the major currency space has been strong against the dollar recently. Gold is also one of the best performers over the past couple of weeks. In fact, it is only outshone by the performance of silver (which is effectively gold on steroids). Also note the lack of performance on the yen, whilst even the other ultra safe haven currency major, the Swissy, is up around +1% in the past couple of weeks against the dollar. The subdued moves on the yen (see relative performance section below) suggests that gold is not acting as a safe haven right now.
Our long term position on gold has been bullish for a while. It has taken some time to break higher from the medium term range, and now we see a decisive emerging. An ongoing dollar weakness in Q3 would certainly help to sustain gold at these elevated levels and perhaps test the $1920 all time high in due course. Fundamentals underpin 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.
Support
- $1805 – intraday low 9th July
- $1789 – 1st July high
- $1770 – 6th July low
Resistance
- $1817 – 8th July high, currently the multi-year high
- $1820 – conservative implied target from April to June range
- $1858 – a more bullish upside projection target
Technical Analysis
A decisive breakout on gold has been seen as the yellow metal has moved above $1800 for the first time since 2011. The move has been characterised by conviction in momentum, something that has tended to be lacking in previous attempted breakouts. The daily RSI has moved into the 70s, Stochastics are consistently now above 80 and MACD lines are accelerating higher.
A breakout from the April to June trading range gave an implied target of around $1820 on a conservative basis, but the more bullish targets can derive $1830 and as much as $1858. There is effectively now a lack of resistance until the all-time high at $1920 from way back in September 2011, so there is little reason not to expect continued upside.
Given the strength of momentum, we are happy to back this run higher, whilst any near term supported weakness will be seen as a chance to buy. The latest breakout around $1789 is initial support, whilst what is close to a five week uptrend is underpinning the run higher around $1780 today.
STRATEGY: We are happy to back the run higher but would look to use near term weakness towards the previous breakouts which are a support band between $1764/$1789 as an opportunity to buy for continued upside. A target range between $1820/$1858 is implied. Given the strength of the breakout, below $1744 would be a shift of outlook.
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