7 minutes to read

Gold clears first hurdle of resistance

Ole Hansen

Head of Commodity Strategy

Summary:  Gold has cleared key resistance alongside the rout in US stocks, and appears to be breaking its negative correlation to rising US real yields and the CNY.


Editor's note: The full-format WCU report will return next week.

Gold seems to be breaking its negative correlation to rising US real yields and the Chinese yuan. The yuan and gold have almost been joined by the hip of late, seeing weakness since the US-China trade war began. However the emerging softness in US stocks this week combined with the recent rise in bond yields and speculation that the dollar may be peaking have triggered renewed demand for diversification and tail-end protection. 

The close correlation between gold and the yuan has baffled the market in recent months. While no clear explanation exists, some speculation has emerged that the People's Bank of China is seeking a stable currency, not against the dollar but against gold. Indeed, XAUCNH (off-shore) and also onshore XAUCNY have traded in a very stable fashion during the recent period. Yesterday, however, the price broke the downtrend from 2016 and while the PBoC has undoubtedly been buying into the recent weakness, we are unlikely to see any selling emerge on renewed gold strength.

Enlarge
Source: Saxo Bank

Yesterday’s weaker-than-expected US CPI reading strengthened the market's belief that the Federal Reserve may be making a policy mistake if it doesn’t step away from its “nowhere near normal” stance on rates.  Together with a bounce in bonds as stocks continued lower, this narrative helped trigger the biggest one-day rally since June 2016, when the Brexit vote in the UK shocked the market.

Gold has now cleared the first hurdle of resistance at $1,210/oz but in order for this to be more than a weak correction within a major downtrend it needs at a minimum to break above $1,238/oz, the 38.2% retracement of this years sell-off.

Enlarge
Source: Saxo Bank

The weekly COT report has highlighted the (up until recently) continued build in speculative short positions held by hedge funds. The peak was reached a couple of weeks back when the net-short hit a record 77,000 lots. This was three times bigger than the previous record short from December 2015, which occurred ahead of the first Fed rate hike. Given the impact of previous periods of short-covering, a return to a neutral position could see the gold price higher by between $50 and $75/oz.

Enlarge
The break above $1,210/oz this week has changed our short-term view from neutral to bullish. A continued focus on stock, bonds, and growth weakness and the potential of the dollar running out of steam could see the metal embark on a recovery towards $1,300/oz, our year-end target. Much still depends, however, on the overall market sentiment, which has been rattled by rising rates and falling stocks. A correction over the coming days following Thursdays strong gains need to be halted ahead of $1,210/oz in order for this improved technical outlook to take hold.

While the S&P 500 was down 5.4% Thursday and heading for its worst week since March, the VanEck Vectors Gold Miners ETF (GDX) was up 6.5%, its best week since January 2017. The exchange-traded fund tracks the performance of and invests in materials stocks of all cap sizes across the globe. Its largest allocation is in North America with Newmont Mining Corp. and Barrick Gold Corp. accounting for close to 20% of its exposure. 
Enlarge
Source: Saxo Bank

You can access both of our platforms from a single Saxo account.

Disclaimer

The Saxo Bank Group entities each provide execution-only service and access to Analysis permitting a person to view and/or use content available on or via the website is not intended to and does not change or expand on this. Such access and use are at all times subject to (i) The Terms of Use; (ii) Full Disclaimer; (iii) The Risk Warning; (iv) the Rules of Engagement and (v) Notices applying to Saxo News & Research and/or its content in addition (where relevant) to the terms governing the use of hyperlinks on the website of a member of the Saxo Bank Group by which access to Saxo News & Research is gained. Such content is therefore provided as no more than information. In particular no advice is intended to be provided or to be relied on as provided nor endorsed by any Saxo Bank Group entity; nor is it to be construed as solicitation or an incentive provided to subscribe for or sell or purchase any financial instrument. All trading or investments you make must be pursuant to your own unprompted and informed self-directed decision. As such no Saxo Bank Group entity will have or be liable for any losses that you may sustain as a result of any investment decision made in reliance on information which is available on Saxo News & Research or as a result of the use of the Saxo News & Research. Orders given and trades effected are deemed intended to be given or effected for the account of the customer with the Saxo Bank Group entity operating in the jurisdiction in which the customer resides and/or with whom the customer opened and maintains his/her trading account. Saxo News & Research 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. To the extent that any content is construed as investment research, you must note and accept that the 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 under relevant laws.

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