Selloff or Market Correction? Either Way, Here's What to Do NextSee Overvalued Stocks

Gold Breaks Out

Published 23/12/2019, 11:55
XAU/USD
-
XAG/USD
-
GC
-
SI
-

On Friday, we wrote on silver, highlighting the metal’s breakout above a key technical level. That made us wonder two things.

First: Was silver about to embark on a major rally? Well, the grey metal has indeed extended its gains and while it may be early days, this could potentially be the beginning of a sizeable rally.

Second, we wondered whether silver’s breakout implied gold would follow suit. Judging by today’s price action, it certainly seems that way with the yellow metal finally breaking above a key technical level circa $1480/81. So it, too, looks bullish for now.

With gold and silver breaking out, the key question is this: Can these precious metals sustain their moves given the still-rallying equity markets? After all, the conventional wisdom is that rising stock prices should be reducing demand for haven metals. However, I think it is no impossible for gold to rally even in this market environment, for these reasons:

  • First and foremost, the negative relationship between gold and the S&P 500 has been broken down over the past few years with both assets moving higher in 2016, 2017 and now 2019, and falling in 2018.
  • Undoubtedly this is, at least in part, because central bank liquidity is finding its way not just in stocks, but other markets too, such as property and gold.
  • Fund managers making profit from their long US equity holdings would be reinvesting in other parts of their portfolios when they rebalance them. This obviously includes safe-haven gold for many money managers.
  • As I have said before, a trade deal between the US and China may be good news for risk assets (and it has), but it is not necessarily bad news for haven gold. After all, rising optimism over a trade deal has helped the yuan strengthen slightly, making gold relatively less expensive in yuan terms. With China being one of if not the largest gold consumer, this implies increased demand from this important market, especially ahead of the Lunar New Year when gift jewellery purchases tend to rise.
  • Meanwhile, yields have stopped going higher again for now as investors realise major central banks are in no rush to exit zero or negative interest rate policy, and QE, any time soon.
  • What’s more, the Dollar Index is at key potential resistance circa 97.70, which means the greenback could potentially resume lower from here and underpin buck-denominated gold and silver.
  • Furthermore, US equity indices look dangerously over-stretched here, with some market commentators suggesting this could be the last hurrah for Wall Street before a possible correction happen possibly as soon as the early days of 2020. Some investors may be pre-empting such scenario and so are positioning themselves now to take advantage of this potential scenario before it happens.
  • Finally, don’t forget that gold broke out of 6-year-old consolidation zone in the summer. That was a massive breakout. After the corresponding rally paused at around $1550 long-term resistance in September, the next phase of the north-bound move could be beginning now.
  • Gold Daily Chart

    Indeed, gold has broken above the pivotal $1480/81 level today, which means the path of least resistance is now to the upside again. As well as horizontal resistance, this level marks the resistance trend of the falling wedge pattern, a bullish continuation formation that has been in place since the metal topped out in September. Thus, for as long we remain above $1481, gold bulls should be happy to pick the dips.

    Disclaimer: The information on this web site is not targeted at the general public of any particular country. It is not intended for distribution to residents in any country where such distribution or use would contravene any local law or regulatory requirement. The information and opinions in this report are for general information use only and are not intended as an offer or solicitation with respect to the purchase or sale of any currency or CFD contract. All opinions and information contained in this report are subject to change without notice. This report has been prepared without regard to the specific investment objectives, financial situation and needs of any particular recipient. Any references to historical price movements or levels is informational based on our analysis and we do not represent or warranty that any such movements or levels are likely to reoccur in the future. While the information contained herein was obtained from sources believed to be reliable, author does not guarantee its accuracy or completeness, nor does author assume any liability for any direct, indirect or consequential loss that may result from the reliance by any person upon any such information or opinions.

    Original Post

    Latest comments

    Loading next article…
    Risk Disclosure: Trading in financial instruments and/or cryptocurrencies involves high risks including the risk of losing some, or all, of your investment amount, and may not be suitable for all investors. Prices of cryptocurrencies are extremely volatile and may be affected by external factors such as financial, regulatory or political events. Trading on margin increases the financial risks.
    Before deciding to trade in financial instrument or cryptocurrencies you should be fully informed of the risks and costs associated with trading the financial markets, carefully consider your investment objectives, level of experience, and risk appetite, and seek professional advice where needed.
    Fusion Media would like to remind you that the data contained in this website is not necessarily real-time nor accurate. The data and prices on the website are not necessarily provided by any market or exchange, but may be provided by market makers, and so prices may not be accurate and may differ from the actual price at any given market, meaning prices are indicative and not appropriate for trading purposes. Fusion Media and any provider of the data contained in this website will not accept liability for any loss or damage as a result of your trading, or your reliance on the information contained within this website.
    It is prohibited to use, store, reproduce, display, modify, transmit or distribute the data contained in this website without the explicit prior written permission of Fusion Media and/or the data provider. All intellectual property rights are reserved by the providers and/or the exchange providing the data contained in this website.
    Fusion Media may be compensated by the advertisers that appear on the website, based on your interaction with the advertisements or advertisers.
    © 2007-2024 - Fusion Media Limited. All Rights Reserved.