Trading outlook:
The momentum of the bull run may have stalled slightly in recent days (something certainly not helped by today’s US public holiday), but gold continues to close consistently above the breakout of the old May high. Performance in light of growing US COVID-19 infection rates, along with implications for the US labor market and economic recovery should continue to underpin gold, as will a dovish Fed. Our strategy continues to be to buy into weakness.
Fundamentals/Newsflow
The breakout of gold in the past couple of weeks may have been a slightly understated move, but the fundamental factors are still underpinning the move and should continue to drive gold higher (although with the US on public holiday today, do not expect too much traction).
The FOMC minutes from Wednesday talked about the prospect of yield curve control. keeping yields low and subdued will sustain support for gold. Recently we have seen the correlation between the 10 year yield and gold become ever more strongly negative at almost -0.8. This is stronger than the 12 month average of the correlation (which is a shade under -0.5) and is likely to recede slightly in the coming weeks, but we still expect subdued yields to be a reason that the market will continue to support gold into any weakness over the medium to longer term.
The significant upswing in cases of COVID-19 in the US (now over 50,000 extra cases per day) will hamper the attempts to re-open the economy from lockdown and flatten off the potential “V” shape of any rebound in growth. Although the US added record numbers of jobs in June, as the July data begins to come through, it is likely to pare the recovery of June. We expect this will weigh on sentiment in the coming weeks. It could also drag on the US dollar too. We would expect this to be positive for gold (as a safe haven which also performs well amidst dollar underperformance).
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 still not decisive, but it is holding. Fundamentals underpin support for gold. Loose global monetary policy for many months (and possibly years) to come, this 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 in. Although we still anticipate a bumpy road on the the way higher, this will also provide opportunities to buy into any weakness.
Support
$1764 – old key May high and breakout support
$1757 – 2nd July low
$1744 – important pivot of lows and highs (between $1744/$1747)
Resistance
$1779 – 2nd July high and previous high, 24th June high
$1789 – 1st July high, now the multi-year high
$1795 – 2012 high
Technical Analysis
On a session where the reaction was broadly risk positive and (eventually USD supportive) in the wake of the Nonfarm Payrolls report, gold closing decisively higher and with a positive candlestick, is encouraging for the bulls. The concern has been that the pullback from $1789 was another bull failure to scupper the breakout once more. However, aside from a brief intraday slip to $1756 (in the minutes following the payrolls announcement), gold held firm above the old May high of $1764 and began to pull higher once more.
This is a good response from the market, which has now closed for five consecutive sessions above $1764. The four week uptrend has been tested (for a few minutes) but essentially holds intact still.
Momentum indicators retain their positive configuration, albeit slightly less positive than a few days ago. Daily RSI is still above 60, whilst Stochastics are above 80. The US public holiday is likely to mean little real conviction from today’s session and with the uptrend at $1769, this may even be breached. However, whilst gold continues to hold above $1764 we are still encouraged for the outlook of further upside to test $1795. The inference of the breakout above $1764 is still an implied target of $1820. We would lose our conviction below $1744.
STRATEGY: The old trading range resistance between $1744/$1764 is now a basis of support for the bulls. We look to use weakness into this area as an opportunity to buy for continued upside towards an implied target of $1820 in due course. Below $1744 would now question the immediate positive outlook, whilst below the old $1720 pivot support would lose bull control again.
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