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As gold prices hit records across the board, will the US dollar be next?

As gold prices hit records across the board, will the US dollar be next?

One of the key moves over the last few days has been the move in the gold price through the July highs of $1,450, and above the $1,500 level for the first time since April 2013. This has raised the possibility of further gains in the days and weeks ahead.

The sharp slide in global bond yields has certainly hastened the rise in the gold price over the last few sessions, and if you look at gold through the prism of other currencies like the euro, Japanese yen and sterling, it is already at record highs, not surprising when German, Japanese and UK yields are at record low levels.

Against the US dollar it still has some way to go before we see the levels we saw back in September 2011 at $1,921, but that doesn’t mean we won’t get there, especially if US yields continue to fall the way they have been recently.

Currently US 10 year yields are sitting 40bps above the record lows we saw in 2016 at 1.3180 in September 2016, however it is the movement in US 2 year yields that could ultimately determine where we go with respect to gold prices.

These are currently at 1.6%, and well above the lows we saw back in September 2011 at 0.143%, which also happened to coincide with the peak in gold prices.

For most of the last two years we saw gold prices run into resistance at $1,380 an ounce and this proved to be a significant barrier to further gains at a time when the Federal Reserve was moving through its rate hiking cycle.

Source: CMC Markets

As soon as it became apparent at the beginning of this year that this hiking cycle was coming to an end the picture for gold started to change, and after brief dip towards its long term moving average in April the move up through $1,380 started to gain momentum, as US 2 year yields started to fall back sharply, through the 2% level and below 1.8%.

The break through $1,380 was also a significant technical signal in that it not only took out a multiyear resistance level, but it also represented a significant Fibonacci resistance level in that it was a 38.2% retracement of the entire down move from the record highs in 2011 to the 2016 lows at $1,045.

With momentum on its side we’ve seen a subsequent move to the 50% level of $1,485 and a new multiyear high at $1,510, though we have since slipped back a touch.

On that basis, given current momentum, we should head towards the $1,585 level, which is the golden ratio of resistance levels, or a 61.8% retracement of the 2011/2016 down move.

It is important to interject a word of caution with regard to this move higher. While we have seen a sharp collapse in bond yields, the amount of negative yielding debt is at record levels at around $15trn, thus far none of these government bonds are denominated in US dollars, which means we could be susceptible to a pullback.

That is an important distinction in this low yield environment which means further upside in gold prices is going to be dependent on the direction of US yields, and whether the global trade picture continues to deteriorate, if the US ups the ante further in what is becoming increasingly like a currency war.

On both daily and the weekly charts the price action is looking increasingly overbought, (above 80%) which suggests a brief pause may well be in order, or even a roll back lower.

Key support areas for gold are expected to come in at $1,480, as well as the June break out point at $1,380.

Disclaimer: CMC Markets Singapore may provide or make available research analysis or reports prepared or issued by entities within the CMC Markets group of companies, located and regulated under the laws in a foreign jurisdictions, in accordance with regulation 32C of the Financial Advisers Regulations. Where such information is issued or promulgated to a person who is not an accredited investor, expert investor or institutional investor, CMC Markets Singapore accepts legal responsibility for the contents of the analysis or report, to the extent required by law. Recipients of such information who are resident in Singapore may contact CMC Markets Singapore on 1800 559 6000 for any matters arising from or in connection with the information.

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