Trading outlook:
Safe haven positioning has boosted gold recently. With fundamental correlations beginning to align and technicals increasingly positive, the outlook for additional gains is improving. We look to use near term weakness as an opportunity to buy gold for further multi-year highs.
Fundamentals/Newsflow
With the emergence of second wave infections of COVID-19 around the world, risk appetite has turned increasingly cautious recently. The is reflected in falling bond yields and sliding equities. Gold, as a safe haven asset, seems to be a beneficiary of this.
The charts below show how correlations for gold with Treasury yields (the US 10 year Treasury yield) and equities (E-mini S&P futures) have become increasingly negative recently.
What is also interesting is that with the United States being significantly impacted now by rising infections, with some states re-engaging lockdown procedures, the dollar is failing to see the benefit from this safe haven flow. As gold has been edging higher in the past week and a half, the dollar has failed to do so. This will be playing into the potential for gold to rally.
The relative performance of majors show three interesting clusters of performance over the past two weeks. The safe haven asset plays are dominating. Leading the way is gold which is closely followed by silver, with both significantly outperforming. The yen and Swiss franc are the next cluster, mildly outperforming the dollar. Then we have the higher risk commodity currencies which are underperforming (along with a near term corrective euro). Finally, we have sterling which seems to be finding a next level of underperformance, way down at the bottom. This all points to being weighted in safe havens right now, with gold being the best performer.
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 even then, this move is not decisive yet. With gold being underpinned by ultra loose global monetary policy for many months (and possibly years) to come, this will keep real yields subdued/negative. This is a good environment to be buying gold in. Although we still believe the path to upside may be bumpy, this will also provide opportunities too.
Support
- $1752 – 3 week uptrend support
- $1744 – important pivot of lows and highs ( between $1744/$1747)
- $1736 – 18th June old high
Resistance
- $1775 – Intraday high, 29th June
- $1779 – 24th June multi-year high
- $1795 – 2012 high
Technical Analysis
Once more we see gold edging higher through resistance but without decisively making the breakout. It is a similar move to the one we saw back in May, where the market moved through resistance to multi-year highs, only to struggle to sustain the traction. This time, we have seen a breakout through $1764 which lends the positive bias, but it is still tough going for the bulls, with some conflicting candlesticks in the past few sessions.
However, there is now a well-defined uptrend that has developed in the past three weeks which is rising around $1751 today. The support is developing around $1744/$1747 from old June highs, which would point to$1744/$1764 now being an area to look for long opportunities.
One of the more significant improvements that has developed in the past week has been the return of a more positive momentum configuration, where Stochastics are consistently holding above 75, RSI holding above 60 and MACD lines rising for the first time since late April.
With the market a shade lower today, we look to us near term weakness now as a chance to buy for moves towards $1795 (the 2012 high) and beyond. A close below $1744 would defer this strategy, whilst a failure of the $1720 pivot would see the bulls losing their control of the market.
STRATEGY: A closing breakout above $1764 has opened a test of $1795/$1800. Given the frequent bull failures in recent months, there is still a degree of caution over the strength of the breakout, but we are happy to back long positions. Below $1744 would now question the bull control, whilst below the old $1720 pivot support would lose bull control again.
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