Trading outlook:
Signs of safe haven positioning (strong ETF inflows) have boosted gold in recent days, and there has been an improving look to technical in recent days. We are encouraged and are still looking for an upside breakout of the medium term trading range. However, with the number of bull failures in recent weeks, we are cautious of calling a breakout ahead of confirmation.
Fundamentals/Newsflow
With gold having been so quiet for much of last week, and limited directional steer from either Treasury yields, or the dollar, we have been looking into the driver behind a strong upside move in the last couple of sessions.
It would appear that gold has been moving higher recently due to inflows into gold ETFs. Some of this can be attributed to safe haven positioning due to concerns over rising reinfection rates of COVID-19 in the US. However, on Friday the June contract for options on the SPDR Gold ETF (NYSE:GLD) expired, which drove a massive inflow into the ETF. According to one source, there was an inflow of 27 metric tons on Friday (c. 974,000 ounces). The question would be whether this inflow continues on gold. So far the move seems to be holding.
Signs are this morning that there is less of a safe haven bias to markets (yields ticking higher, USD slipping) and with gold trading more of a safe haven recently (see relative performance below) this could begin to weigh on the move higher. So far the bulls are holding up well for the test of $1764, however, we remain cautious as to whether the drivers of this uptick on gold in the past few sessions can continue to drive the market higher. It may require further newsflow on increases in US infection rates to see the resistance broken (or at least to hold any breakout).
Below we see gold is still performing relatively well against the dollar when up against major currencies. However, note the slide back in the Japanese yen. Could this be an early sign of a switch out of safe havens again?
Our long term position on gold remains bullish as the move higher will be underpinned by ultra loose monetary policy for months and possibly years to come (which will keep real yields subdued/negative). We expect the medium term range will be broken to the upside in due course and $1800 will likely be tested, however the path to get there, with a choppy near term outlook, could be tricky to navigate.
Support
- $1744 – 22nd June low
- $1736 – 18th June old high
- $1712 – 17th June low
Resistance
- $1764 – 18th May high
- $1795 – 2012 high
- $1800 – psychological
Technical Analysis
The bulls are holding on to the initial break above $1744 resistance and are now looking to position for what would be a key medium upside break of the two month trading range $1660/$1764. After two months of false dawns and bull failures, can this time be different?
There is a notable improvement in momentum underway. The RSI close above 60 yesterday, which is the first time this has happened in over a month. The Stochastics look positively configured to sustain a bull run, whilst even MACD lines are ticking higher from a bull cross. Last night’s close of $1754 was a second consecutive bull candle but also is actually the highest closing price on gold since 2012.
The market did have a look at $1764 resistance yesterday but backed off. It does now mean that the bulls need to hold firm today. The daily chart shows a mild negative candle currently for today, whilst the hourly chart has hints of negative divergence on momentum which suggests some cause to be careful with chasing for a breakout.
Holding on to support of the breakout above $1744 will help to build pressure for the test of $1764. We have become ever more cautious of upside moves on gold in the past two months, and we need confirmation of a breakout before we can trust that this is not simply part of the medium term trading range still. Despite this though, we are still on the lookout for an eventual upside breakout of the medium term trading range. It is just whether this is the time at which we see it. We remain to be convinced.
STRATEGY: A closing breakout above $1764 would be bullish and open for $1795/$1800 as the next target area. However, given the number of recent bull failures, we would not be front running a breakout. If near term support can continue to build between $1736/$1744 then the prospects will further improve. Below $1730 loses conviction for a potential breakout and would re-affirm gold as a medium term range play.
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