Gold breaks out

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By :  ,  Financial Analyst

On Friday, we wrote on silver, highlighting the metal’s breakout above a key technical level. That made us wonder two things. First: Was silver about to embark on a major rally? Well, the grey metal has indeed extended its gains and while it may be early days, this could potentially be the beginning of a sizeable rally. Second, we wondered whether silver’s breakout implied gold would follow suit. Judging by today’s price action, it certainly seems that way with the yellow metal finally breaking above a key technical level circa $1480/81. So it, too, looks bullish for now.

With gold and silver breaking out, the key question is this: Can these precious metals sustain their moves given the still-rallying equity markets? After all, the conventional wisdom is that rising stock prices should be reducing demand for haven metals. However, I think it is not impossible for gold to rally even in this market environment, for these reasons:

  • First and foremost, the negative relationship between gold and the S&P 500 has been broken down over the past few years with both assets moving higher in 2016, 2017 and now 2019, and falling in 2018.
  • Undoubtedly this is, at least in part, because central bank liquidity is finding its way not just in stocks, but other markets too, such as property and gold.
  • Fund managers making profit from their long US equity holdings would be reinvesting in other parts of their portfolios when they rebalance them. This obviously includes safe-haven gold for many money managers.
  • As I have said before, a trade deal between the US and China may be good news for risk assets (and it has), but it is not necessarily bad news for haven gold. After all, rising optimism over a trade deal has helped the yuan strengthen slightly, making gold relatively less expensive in yuan terms. With China being one of if not the largest gold consumer, this implies increased demand from this important market, especially ahead of the Lunar New Year when gift jewellery purchases tend to rise.
  • Meanwhile, yields have stopped going higher again for now as investors realise major central banks are in no rush to exit zero or negative interest rate policy, and QE, any time soon.
  • What’s more, the Dollar Index is at key potential resistance circa 97.70, which means the greenback could potentially resume lower from here and underpin buck-denominated gold and silver.
  • Furthermore, US equity indices look dangerously over-stretched here, with some market commentators suggesting this could be the last hurrah for Wall Street before a possible correction happen possibly as soon as the early days of 2020. Some investors may be pre-empting such scenario and so are positioning themselves now to take advantage of this potential scenario before it happens.
  • Finally, don’t forget that gold broke out of 6-year-old consolidation zone in the summer. That was a massive breakout. After the corresponding rally paused at around $1550 long-term resistance in September, the next phase of the north-bound move could be beginning now.

Indeed, gold has broken above the pivotal $1480/81 level today, which means the path of least resistance is now to the upside again. As well as horizontal resistance, this level marks the resistance trend of the falling wedge pattern, a bullish continuation formation that has been in place since the metal topped out in September. Thus, for as long we remain above $1481, gold bulls should be happy to pick the dips.

Source: City Index and Trading View

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