Trading outlook:
The development of a broadly cautious appetite for risk has helped gold breakout. The bulls are looking to consolidate this move and although the upside impetus has waned slightly in recent sessions, the building of support is encouraging. We hold a degree of caution in light of bull failures over the past few weeks, but the outlook is positive for further gains towards $1795/$1800. We look to use any near term weakness supported above $1744 as a chance to buy.
Fundamentals/Newsflow
Consolidation has taken over gold early this week. It comes as Treasury yields (which tend to be the primary driver of gold) have become very subdued. Whilst we do not anticipate a significant breakdown on yields (which could hamper decisive upside traction on gold) we still see low yields being supportive for gold.
Despite this consolidation, the correlations for gold remain supportive for the breakout and means that we retain a constructive outlook.
The negative trend of equities is coming whilst gold is trending higher. Both these trends holding firm is supportive for gold.
The performance of gold has also held its ground even amidst a rebound on the dollar in recent sessions.
The fact tat gold is holding ground, even amidst a slight dollar strengthening today, is encouraging for the prospects of further gains. This is shown below in the relative performance chart of the past couple of weeks. Gold and silver remain the standout performers (also worth noting is the big swings on silver around the more steady performance of gold).
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. Yet with ultra loose global monetary policy for many months (and possibly years) to come, this will keep real yields subdued/negative and should continue to underpin an appetite to support gold. Subsequently, this is still a good environment to be buying gold in. Although we still anticipate a bumpy road on the the way higher, this will also provide opportunities to buy into any weakness.
Support
- $1765 – 29th June low
- $1756 – 3 week uptrend support
- $1744 – important pivot of lows and highs ( between $1744/$1747)
Resistance
- $1775 – 29th June high
- $1779 – 24th June multi-year high
- $1795 – 2012 high
Technical Analysis
If last week was all about the breakout, it would appear that this week is all about consolidating the move. Since the original March rally tailed off in mid-April, it has effectively taken more than two months for the bulls to make their next move. However, with several false dawns in that time, perhaps it is understandable that the market is taking this breakout with caution. We are accordingly cautiously positive with this move.
Holding above $1744 will now be a key gauge as to the outlook of the market. This breakout above $1764 (the old May high) has been consolidated in recent sessions, but the signs are encouraging for the bulls. Previous moves higher in May and early June came with wilting momentum. However, on this occasion, we see RSI pulling decisively above 60 (the highest since April), Stochastics holding bullish configuration and MACD lines tracking higher.
A three week uptrend lends support at $1756 today and we would look to use supported weakness (holding above $1744, but ideally above the uptrend) as a chance to buy. The rally high of $1779 from last week is a multi-year high, but if the bulls can continue to build support above $1744 then a move to $1795 (the key 2012 high) is very likely.
The hourly chart reflects a mild consolidation forming, but still holding positive configuration, we favour another upside break. Below $1744 would defer this outlook, whilst $1720 remains a basis of medium term pivot support.
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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