Gold prices have pushed back a bit settling into a range of 1360 and 1350 since prices posted at high at 1375.29 on July 6th. On a more local level, the $1350 round number has seen prices consolidating strongly since July with no clear direction being established yet. Gold continues to remain a favorite for investors despite prices sitting pretty near a two and a half year high. This week, gold prices fell to a two-week low on Monday with price action giving no hints. The main event this week will be Janet Yellen’s speech at the Jackson Hole Symposium.
Ms. Yellen’s speech gains importance given that the market and the Fed’s expectations on interest rates have diverged. Although there is still hope for another rate hike this year, the focus for investors is whether the Fed will hike rates in September or in December. Over the last week, various Fed members have given interviews or spoken at public events with most of them painting a hawkish picture and speaking in support hiking interest rates.
High profile investors continue to pile on into gold
The latest to join the bullish camp for gold is Lord Jacob Rothschild. Last week, the chair of the Rothschild Investment Trust revealed in an investment note that with central bankers continuing with their “greatest monetary policy experiment” the markets are in uncharted waters, making it impossible to predict the consequences of low-interest rates with nearly 30% of global government debt yielding negative returns. “To date, at least in stock market terms, the policy has been successful with markets near their highs, while volatility, on the whole, has remained low. Nearly all classes of investment have been boosted by the rising monetary tide. Meanwhile, growth remains anaemic, with weak demand and deflation in many parts of the developed world.”
Lord Rothschild joins the ranks of other high-profile investors such as Soros among others who have turned bullish on gold since earlier this year. Soros, however, has cut down his exposure to gold. Soros Fund Management reportedly cashed out after gold prices had surged to a two-year high, in both gold-backed ETF’s and gold miner stocks. By the end of Q2 2016, Soros reduced his holdings to 240,000 shares in the SPDR Gold Trust ETF.
Investors have been unconcerned by the strong rally in gold which has seen no meaningful pullbacks to the rally. Nick Peters, a multi-asset investor at Fidelity said, “Although we have seen a significant rally in gold, I think investors should still consider an allocation to the precious metal. Gold can function as a safe haven during times of market volatility and provide strong countervailing returns to equities. This is useful when many equity markets look expensive.” Peters, however, cautioned investors that it is difficult to identify a good time to start buying gold (at the current levels).
Technical Outlook – Mind the divergence
The daily chart for spot gold prices shown below shows prices hovering near the $1350 handle with multiple tests back to the 1360 – 1350 price level which is currently establishing as a resistance level. The 13-period RSI shows a negative or a bearish divergence which could point to a correction in gold if price indeed pushes lower. $1300, a round number psychological level is most likely to act in as support ahead of further declines to $1250 where the bearish divergence and the correction in prices could be completed. In terms of the trend lines, we can anticipate a strong test of support near the $1300 level after prices broke out from the steeper rising trend line a few days ago.
In conclusion, while gold remains undecided for now, further gains can be expected only on a convincing breakout above $1350 – $1365 which is currently a strong resistance level. To the downside, any near-term corrections to the rally could see initial support at $1300, while a break of the major rising trend line could signal further continuation towards $1250.
US Economic Calendar
- 1230 GMT, Aug 25, Durable goods orders: Exp. 3.50% (prev. -3.90%)
- 1230 GMT, Aug 26, US GDP, 2nd estimates (Q2): Exp. 1.10% (prev. 1.20%)
- 1400 GMT, Aug 26, Fed Chair, Yellen speech