Earlier this month (July 9th) we checked in with gold and silver…
Both precious metals were taking a bath and I said “gold’s resolve was about to be tested”
Probabilities suggested that $1,200 would be the line-in-the-sand for gold. In other words, this is where it needed to find buying support – otherwise things could get really ugly.
Let’s start with a chart I produced from ~2 weeks ago (and expected price action):
$1,200 is the bottom of the distribution we have been watching since the start of the year.
For 7 months we have traded within this structure… enough to send any trader to sleep!
With that, let’s see if the true believers were up to the challenge:
The tape didn’t let us down. We were just $4 out with our best guess.
The yellow metal found its way down to $1,204 and caught a bid. As I say, probabilities suggested this was likely to happen (ie not certain – but likely)
Today our weekly trend is still largely flat (slightly bullish if anything) however the weekly-MACD indicates the sellers are sitting close by.
As such, my guess is expect to see a move back to $1,300 over the next few weeks.
It’s tried this stunt a couple of times this year but failed both times. I don’t see why it won’t try again.
However, if it can bust through $1,300… then it things will get far more interesting.
That’s where the buyers and sellers will really fight it out. So far the sellers are winning that battle…
US Dollar Index
For me, gold’s fortunates very much depend on what we see with the US dollar (and to an extent, the US 10-year Treasury yield)
As we have shown several times over the past 5+ years (the blog started in 2012) — when we see weakness in the dollar, gold will generally advance (and vice versa)
As I will show in a moment, the dollar remains in a bearish weekly trend.
For example, this week it tested a 13-month low against a basket of major currencies.
Not hard to explain why – more US political turmoil dampened hopes for any further reform from DC (and why the AUD is higher).
The “shit show” we see in DC doesn’t look like ending anytime soon.
But as I often remind readers — whether or not you think Trump is totally incompetent (most do) – it matters little opposite the tape.
For example, stocks are at record highs…right!
It could not give a flying f*&k about things like Russian investigations, what assets Kushner has, trade deals with China, North Korean nukes and whether Obamacare is reformed and replaced!
But what it DOES care about is the price of money; ie monetary policy. That matters.
Now with respect the dollar index – for it to rebound – I think we will need to see a rebound in US treasury yields. In other bonds, we need to see further selling in Treasuries.
The lower treasury prices go – the higher yields go (and vice versa).
And right now – that is not happening. For example, the all-important US 10-year treasury yield hit a three-week low recently:
Put another way, bond prices are catching a bid as investors seek safety.
Thus, for the dollar to reverse its bearish trend – yields need to be headed higher.
With that – let’s update the chart for the dollar:
The trend turned bearish for the US dollar index the week ending May 19th – where it closed around 97c. Since then it has been belted… and it doesn’t look finished yet.
Again, it’s largely why we have seen gold tick higher (more on this shortly).
As I write, the dollar looks oversold in the near-term so expect a bit of short-covering (as traders lock in profits). However, I expect it to continue to fall the 61.8% zone of our structure of around 91.5
If we see that, I would not be surprised to see gold test $1,300.
Obviously if the USD breaks below this level – this gold may bust higher. However, if the dollar catches a bid (which is what I expect) – then gold will reverse.
Putting it All Together…
The US dollar index and gold very much enjoy an inverse relationship – especially over the longer-term.
Take a look:
Today, the direction for the USD index is lower so gold is catching a bid. However, that bid is not as strong as some would have expected.
As I have said in the past – for gold to really get traction – we need to see strong inflation.
And that’s not happening (especially given low oil prices).
In closing, what’s of most interest to me (from a trading perspective) is if gold can burst through $1,300.
Then maybe we’ll finally see higher prices… but until then I think it’s range bound.
… trade the tape
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