Having trouble trading Gold? This may be why.
Gold continued to rise in the second quarter, with prices hovering near a two-year high ahead of the midyear mark. The markets’ skepticism about the prospects for further rate hikes from the Federal Reserve appears to account for the metals gains. This encouraged the appeal of alternative stores of value against fiat assets and reduced the cost of owning them relative to yield-bearing alternatives.
US economic news-flow disappointed relative to consensus forecasts through mid-May, suggesting the central bank would not be able to justify tightening. A pickup in activity thereafter appeared to mark something of a reversal and encouraged a hawkish turn in policymakers’ rhetoric, but May’s unexpectedly dismal US payrolls data and the shocking outcome of the UK “Brexit” referendum erased hopes for even one 25bps rate increase.
At surface level, more of the same seems likely ahead. The Fed has been reluctant to raise rates during episodes of turmoil in the financial markets even if US economic news-flow appeared relatively well-anchored. It seems reasonable to suspect they will continue to stay their hand as markets remain jittery after the UK’s decision to leave the European Union.
First, it seems like investors will have to wait for at least several months before a new Prime Minister steps in to lead negotiations on the terms of the EU/UK rupture. This bodes ill for global growth as lingering uncertainty cools economic activity, encouraging risk aversion. Second, capital outflows from the Pound and other currencies in the line of fire – notably, the Euro – will probably boost the US Dollar and cool inflation.
The latter point presents a complication. Gold is priced in terms of the greenback on global markets. If it continues to strengthen as haven-seekers flock to the relative security of US Treasury bonds and abandon Brexit-linked reserve currencies, the yellow metal may face de-facto selling pressure. Priced-in Fed rate hike bets already discount further tightening in 2016, which could help set the stage for such a scenario.
This makes for a clouded outlook in the months ahead. The “Brexit” drama has compounded an already challenging landscape fraught with conflicting forces pulling gold in opposite directions. Three-month volatility bets implied in options have surged to snap a two-month losing streak however, seemingly making the likelihood of sharp price swings the only truly confident bet to be made.
Technicals: Gold Approaches Key Resistance into 3Q
Gold Weekly Chart - Created by Michael Boutros, Currency Strategist with Trading View Charts on DailyFX.com
Gold continues to trade within the confines of a well-defined ascending median-line formation dating back to the 2015 lows with a sliding parallel extending off the early-February high continuing to cap the rally for now. Back in March we noted that, “since the late-2011 record high, gold prices have tended to make the yearly high in price within the first quarter and a breach of the 2016 high over the next few months would offer further conviction on a broader turn higher in bullion.”
Indeed gold pushed into new highs with the UK Referendum spurring a flight to quality which took bullion into confluence resistance at 1358. This level is defined by the key 61.8% extension of the advance off the 2015 low and converges on basic trendline resistance extending off the all-time 2011 high heading into the start of the third quarter. The rally marked the largest weekly trading range since February with ongoing weekly divergence into these highs leaving the immediate topside bias vulnerable heading into the open of July trade.
That said, look for initial support at the 52-week moving average (currently ~1309) backed by 1239/44 & the median-line extending off the July 2015 low. From a trading standpoint we would be looking for a low near these levels if in fact the yellow metal is still on pace for a move higher. A breach above the 38.2% retracement of the 2011 decline at 1380 is needed to validate a break-out of the long-running formation off the highs with such a scenario targeting resistance objectives at 1433, the 100% extension at 1456 & the 50% retracement at 1483. A break below 1202 invalidates the long-bias with a move below confluence support at 1166/71 needed to put the bears back in control. We’ll take a more neutral stance heading into July with a general topside bias in play while above 1200.
DailyFX Market Opinions
Any opinions, news, research, analyses, prices, or other information contained in this report is provided as general market commentary, and does not constitute investment advice. DailyFX will not accept liability for any loss or damage, including without limitation to, any loss of profit, which may arise directly or indirectly from use of or reliance on such information.
Accuracy of Information
The content in this report is subject to change at any time without notice, and is provided for the sole purpose of assisting traders to make independent investment decisions. DailyFX has taken reasonable measures to ensure the accuracy of the information in the report, however, does not guarantee its accuracy, and will not accept liability for any loss or damage which may arise directly or indirectly from the content or your inability to access the website, for any delay in or failure of the transmission or the receipt of any instruction or notifications sent through this website.
This report is not intended for distribution, or use by, any person in any country where such distribution or use would be contrary to local law or regulation. None of the services or investments referred to in this report are available to persons residing in any country where the provision of such services or investments would be contrary to local law or regulation. It is the responsibility of visitors to this website to ascertain the terms of and comply with any local law or regulation to which they are subject.
High Risk Investment
Trading foreign exchange on margin carries a high level of risk, and may not be suitable for all investors. The high degree of leverage can work against you as well as for you. Before deciding to trade foreign exchange you should carefully consider your investment objectives, level of experience, and risk appetite. The possibility exists that you could sustain losses in excess of your initial investment. You should be aware of all the risks associated with foreign exchange trading, and seek advice from an independent financial advisor if you have any doubts.