Trend is your friend Trend is your friend Trend is your friend

Trend is your friend

Forex 4 minutes to read
Junvum Kim

Sales Trader

Summary:  Between Q4 2008 and Q1 2011, spot gold (XAUUSD) recorded an unprecedented 12 consecutive quarterly gains posting 86% and $2000 has been breached this year.


Between Q4 2008 and Q1 2011, spot gold (XAUUSD) recorded an unprecedented 12 consecutive quarterly gains posting 86% all the way from $870 to $1,624 – high being $1,921.  One of the major triggers of this near 3-year rally was the beginning of Quantitative Easing (QE) with big rate cuts (from 2% to 0.25%) from Fed that looked to revive economy from Global Financial Crisis (GFC).  On the other hand, US dollar index (DX) traded sideways ranging between 75 and 85 until Q3 2014.

Similar price action is being witnessed this year as XAUUSD ignited upward momentum again by breaking out of the 3-year resistance area of $1,370 after Fed started cutting rates again (from 2.5% to 0.25%) from Q3 2019.  XAUUSD is on track for its 9th straight quarterly gains as we approach the year end and more importantly it has already reached beyond $2,000 mark setting all time high $2,075 back in early August this year. 

Since the quarterly winning streak started in Q4 2018 coinciding with “golden cross” – when 50 day moving average (DMA) cut above 200 DMA – an uptrend formed as 200 DMA also becoming a support level that was tested about three previous occasions.  Simple moving average (SMA) is calculated by taking the average of the latest prices within the period – i.e. 200DMA refers to last 200 days of prices.  The shorter the period, the faster the change and capturing the more recent price action, and vice versa for longer period.  Exponential moving average (EMA) is weighted average having more emphasis on the most recent data.

At the end of the day, price actions are formed from price changes that records open, high, low and close.  These may indicate no more than mere historical statistics and they are unlikely to be reliable at predicting future directions, however out of many technical indicators out there, SMA could be worth looking as minor supplementary analysis tool when it comes to validating the trend whether it is up or down, and also anticipating any potential reversal of the trend.

US dollar (DX) has been broadly weak against major currencies (90.44 being lowest since late Apr 2018) particularly since early Nov, but ironically XAUUSD is still struggling to stay above October close of $1,878, while EURUSD is up 4.7%, AUDUSD +7.7% and USDCNH is down -2.8%.  YTD return of XAUUSD is 22.5% as it is stuck right in the middle of $1,800 and $1,900 but XAUAUD is only having YTD return of 13.5% due to strength in AUD on the back of the surging base metal prices and risk-on sentiments in the stock markets.

There are two obvious differences between XAUUSD and XAUAUD.  First one is the fact that XAUUSD still maintains prices above 200DMA while XAUUSD has been trading below both 50DMA and 200DMA for more than a month.  Furthermore “death cross” – inverse of golden cross that was discussed above - has already formed and this crossover could indicate sell signal with 200DMA potentially switching from support to resistance level.  The second observation is the current level where XAUAUD is trading.  $2,400 has served as major support level since early March this year and every time it was tested, buyers came to lift the prices back up.  In fact, we have seen four breaks below $2,400 – twice in March, one in June and last one at the end of November.  Therefore clear breakout or at least daily close below $2,400 would be required to open up for further momentum to the downside towards $2,300, otherwise we expect some retracement back up to $2,600 near 200DMA.

Even though, the correlation between gold and inflation expectation has dropped from 0.5 (in Apr-May and Oct), we continue to watch the 10 year break even rate – difference between nominal treasury yield vs TIPS – as the rate has been steadily rising more than 23 basis points in less than a month and less than 10 bps away from hitting 2% mark, hence XAUUSD still remains as popular go-to inflation hedge while the current outperformance from XAUUSD over XAUAUD may continue to exist or even widen as long as US dollar continues to descend and “Powell Put” – Fed’s action to step in to rescue the markets - stays put.

Disclaimer

Saxo Capital Markets (Australia) Limited prepares and distributes information/research produced within the Saxo Bank Group for informational purposes only. In addition to the disclaimer below, if any general advice is provided, such advice does not take into account your individual objectives, financial situation or needs. You should consider the appropriateness of trading any financial instrument as trading can result in losses that exceed your initial investment. Please refer to our Analysis Disclaimer, and our Financial Services Guide and Product Disclosure Statement. All legal documentation and disclaimers can be found at https://www.home.saxo/en-au/legal/.

The Saxo Bank Group entities each provide execution-only service. Access and use of Saxo News & Research and any Saxo Bank Group website are subject to (i) the Terms of Use; (ii) the full Disclaimer; and (iii) the Risk Warning in addition (where relevant) to the terms governing the use of the website of a member of the Saxo Bank Group.

Saxo News & Research is provided for informational purposes, does not contain (and should not be construed as containing) financial, investment, tax or trading advice or advice of any sort offered, recommended or endorsed by Saxo Bank Group and should not be construed as a record of our trading prices, or as an offer, incentive or solicitation for the subscription, sale or purchase in any financial instrument. No representation or warranty is given as to the accuracy or completeness of this information. All trading or investments you make must be pursuant to your own unprompted and informed self-directed decision. No Saxo Bank Group entity shall be liable for any losses that you may sustain as a result of any investment decision made in reliance on information on Saxo News & Research.

To the extent that any content is construed as investment research, such content was not intended to and has not been prepared in accordance with legal requirements designed to promote the independence of investment research and as such, would be considered as a marketing communication.

None of the information contained here constitutes an offer to purchase or sell a financial instrument, or to make any investments.Saxo Capital Markets does not take into account your personal investment objectives or financial situation and makes no representation and assumes no liability as to the accuracy or completeness of the information nor for any loss arising from any investment made in reliance of this presentation. Any opinions made are subject to change and may be personal to the author. These may not necessarily reflect the opinion of Saxo Capital Markets or its affiliates.

Please read our disclaimers:
- Full Disclaimer (https://www.home.saxo/en-au/legal/disclaimer/saxo-disclaimer)
- Analysis Disclaimer (https://www.home.saxo/en-au/legal/analysis-disclaimer/saxo-analysis-disclaimer)
- Notification on Non-Independent Investment Research (https://www.home.saxo/legal/niird/notification)

Saxo Capital Markets (Australia) Limited
Suite 1, Level 14, 9 Castlereagh St
Sydney NSW 2000
Australia

Contact Saxo

Select region

Australia
Australia

The Saxo trading platform has received numerous awards and recognition. For details of these awards and information on awards visit www.home.saxo/en-au/about-us/awards

Saxo Capital Markets (Australia) Limited ABN 32 110 128 286 AFSL 280372 (‘Saxo’ or ‘Saxo Capital Markets’) is a wholly owned subsidiary of Saxo Bank A/S, headquartered in Denmark. Please refer to our General Business Terms, Financial Services Guide, Product Disclosure Statement and Target Market Determination to consider whether acquiring or continuing to hold financial products is suitable for you, prior to opening an account and investing in a financial product.

Trading in financial instruments carries various risks, and is not suitable for all investors. Please seek expert advice, and always ensure that you fully understand these risks before trading. Saxo Capital Markets does not provide ‘personal’ financial product advice, any information available on this website is ‘general’ in nature and for informational purposes only. Saxo Capital Markets does not take into account an individual’s needs, objectives or financial situation. The Target Market Determination should assist you in determining whether any of the products or services we offer are likely to be consistent with your objectives, financial situation and needs.

Apple, iPad and iPhone are trademarks of Apple Inc., registered in the US and other countries. AppStore is a service mark of Apple Inc.

The information or the products and services referred to on this website may be accessed worldwide, however is only intended for distribution to and use by recipients located in countries where such use does not constitute a violation of applicable legislation or regulations. Products and Services offered on this website is not intended for residents of the United States and Japan.

Please click here to view our full disclaimer.