Gold Consolidation Continues, But Is A Breakout About To Be Seen?

July 16, 2020

London (July 16)  Gold continues to consolidate its breakout to multi-year highs as it has formed a tight trading band of the past week. Whilst a minor dollar rebound has held the bulls back int he past 24 hours, we continue to expect gold to break higher in due course. Even if the trend higher is broken, with strong fundamentals in place, we would be looking to use near term weakness as a chance to buy.


The breakout to new multi-year highs above $1789 has consolidated over the past week. However, with gold’s negative correlations still very strong, we see further upside as likely on gold in due course. The US dollar is the primary driver at the moment, but equally, we see moves on the US 10 year Treasury yield have a key role to play.

In the past couple of weeks, gold has developed an increasingly strong negative 21 day correlation with the dollar (today at -0.80). This correlation has become extended and perhaps even approaching extreme (historically the 12 month average of the correlation is -0.14), but the give the strong trends forming on both, this does not suggest an imminent breakdown of the correlation.

Moves on the dollar point towards a downside break on the Dollar Index below 95.70 in the coming weeks and this is likely to be a driver of the next upside move on gold. As the dollar ticks higher early today, gold has slipped. However, the trend lower on the dollar continues and we are happy to be long of gold.

Yields are also trending lower, but in a slightly less pronounced fashion. With comments from the FOMC’s Eric Rosengren (who leans slightly hawkish on the FOMC) talking up the potential for yield curve control, we expect to see yields subdued in the coming months. This will add to support for gold. Given the fact that yields are ticking a shade lower this morning, and gold is also lower (whilst USD is slightly higher), this would suggest that the dollar is still the main driver of gold for now.

The relative performance chart of the past couple of weeks, shows gold performance strength is only outshone by silver. Pretty much everything is slipping against the dollar today.

Our long term position on gold has been bullish for a while and remains so. We expect further upside to be seen. Subdued yields and an ongoing dollar weakness in Q3 would help to sustain gold at these elevated levels and perhaps test the $1920 all time high in due course. Fundamentals underpin and point to continued support for gold. Loose global monetary policy for many months (and possibly years) to come, 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 into weakness.

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