Gold set for solid weekly gain as EU stocks tank

Gold is on track to chalk up solid gains for a second week running. Although the dollar has bounced back in the last couple of days of this week, it had fallen sharply the week prior as contrary to the FOMC’s last meeting minutes, the Fed made it clear that a rate hike on Wednesday of next week was highly unlikely as it expressed concerns about the May US jobs report and the potential implications of Britain leaving the EU (Brexit). The probability of a July rate rise has also fallen quite sharply.

Consequently, the Fed will continue to watch new incoming data like a hawk, especially this month’s jobs report which will be released in early July. Next week, there will also be a few important US macro pointers which may impact the timing of the next rate hike. These include retail sales (Tuesday); Producer Price Index and industrial production (Wednesday), and the main measure of inflation: Consumer Price Index (Thursday).

In Europe, yields on 10-year German Bunds hit repeated all-time lows and on Friday they stood at just 0.019 per cent. This came as the ECB started purchasing bonds of corporations as part of its wider quantitative easing programme. UK’s equivalent 10-year yields also hit a record low as bond prices rose. In addition, the European stock markets, which had been lagging Wall Street for weeks anyway, fell sharply in the second half of the week.

The falling stock markets and bond yields boosted the appeal of the non-interest-bearing, buck-denominated and safe haven gold. Sentiment has been downbeat in Europe because of Brexit fears and also the lack of economic growth despite the ECB’s on-going monetary efforts. With the EU referendum now less than two weeks away, the cost of protecting against falls in the pound has soared to record levels, even as betting odds on ‘remain’ have risen to a good 75 per cent, according to BetFair.

But has gold gone too far, too fast in this stage of the bull cycle? Well, not really is the short answer. For after all, it continues to remain inside a larger consolidation pattern between $1200 and $1300. The bulls will be pleased to see the prior broken resistance at $1200 once again holding up as support. In addition, gold has risen back above the 21-day exponential and 50-day simple moving averages. These moving averages are pointing higher and are above the slower 200-day moving average. Clearly then, the underlying trend is bullish even if gold is effectively still in a larger consolidation.