UPDATE: Buying gold on rising trade tensions

Short Term / Buy

Ole Hansen

Head of Commodity Strategy
Ole Hansen joined Saxo Bank in 2008 and has been Head of Commodity Strategy since 2010. He focuses on delivering strategies and analyses of the global commodity markets defined by fundamentals, market sentiment and technical developments.

Instrument: Spot: XAUUSD, Future: GCQ8 or CFD: GOLDAUG18
Price Target: ½ at $1,306/oz. and ½ TBA
Market Price: : ½ at current level around $1,273/oz and ½ on a break above $1,286/oz.

Background:

UPDATE: Gold has weakened further as the technical picture has continued to deteriorate while improved gold fundamentals such as trade tensions, a slightly weaker dollar, lower US bond yields, and a continued decline in global stocks have failed to make an impact. 

The price has hit $1,258/oz which was our stop on the ½ long entered last week. The “death cross” (which occurs when the 50 DMA crosses below the 200 DMA) has received a great deal of attention and likely supported additional selling this week. 

The 14-day RSI is now showing gold to be the most oversold since December 2016. The next major level of support can be found just below $1,240/oz. while potential buyers are likely to sit on the fence until we see a break back above $1,286/oz.

XAUUSD


A trade war between the US and China looks increasingly likely. The ramp up in trade tensions continued overnight when China vowed it would retaliate after Trump threatened to impose  fresh tariffs on $200bn worth of Chinese goods. The market has responded by sending the dollar and bonds higher and stocks lower. Gold remains caught up in this battle between the strong dollar versus raised geopolitical risks. 

It’s our view that the higher the dollar climbs on trade frictions the more global growth could end up suffering as consequence. A trade war leaves no winners, especially not the already heavily indebted emerging market economies which are faced with lower activity, a weaker currency and rising dollar debt. 

On that basis gold is likely to continue to struggle in the short term as the dollar appreciates. But with stock market volatility on the rise and bonds back in demand we see a favourable outlook for gold emerging.

Management And Risk Description:

The biggest challenges of being long gold are lower oil prices as this reduces inflationary pressure, a poor technical picture following the recent sell-off and a continued dollar surge.  Should the US and China once again step back from the brink a relief rally across other assets may also hurt gold's prospects. 

The first stop level $15/oz below entry will take it below support at $1,267/oz, the 76.4% retracement of the December to January rally. Our second entry level at $1,286/oz reflects the previous support that was broken last Friday while the first take profit is just ahead of the 200-day moving average at $1,306/oz, a level which has provided strong resistance in recent weeks. In order to isolate additional dollar appreciation XAUEUR can be considered as an alternative.

Parameters:

Entry: One ½ at current level around $1,273/oz and the other ½ on a break above $1,286/oz
Stop: 1 1/2 ATR = $15/oz below entry (move stop higher once both entry levels have been hit)
Target: ½ at $1306/oz. and ½ TBA
Time Horizon: Short-term

      
-- Edited by

Clare MacCarthy

Gold is looking for support from lower US 10-year real yields and a potentially stronger JPY as risk-off sentiment spreads:

Sentiment has yet to recover following last Friday's washout of speculative longs and with the dollar, especially against EM currencies and the euro, continuing to rise potential buyers need to be patient. This is why we are recommending a gradual, step-by-step approach to position-building.

Short-term chart.                                                                                                                         Source: Saxo Bank

Long-term chart.                                                                                                                              Source: Saxo Bank

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