Will Gold Get The Last Laugh?

It’s safe to say it’s been a volatile week for markets and a bad one for stocks. But, with the rout showing early signs of abating, we’d like to finish the week focussing on a market which went up this week.

At the beginning of the month we highlighted Gold’s potential to break higher. Noting the general lack of mean reversion throughout 2018’s decline, signs of bearish capitulation at the lows along with extreme short positioning, we felt gold was “vulnerable to rapid short-covering if market sentiment changes abruptly”. Well, sentiment certainly changed and gold’s prospects have picked up.

Using a simple, equally weighted gold basket against FX majors, a broad-based breakout is more than apparent. As the weekly chart is rising against a basket of currencies it means Gold’s breakout isn’t exclusively around a weaker USD. It’s also interesting to note the gold basket broke its prior swing high last week, ahead of XAU/USD.

Switching to the daily XAUUSD chart, yesterday’s close of 2.3% was its most bullish session since June 2016 and means that the five most volatile sessions since the 1160.25 low have been to the upside. With a higher swing low and decisive break out of consolidation, it sends a change of trend warning. It would be nice to see 1214.35 hold as support, but we see its potential to test the 1236.32-1242.72 zone and 1265.96 high if the 1180.82 low holds.

Given the extreme positioning its possible recent developments (or beatings) on the stock market could rekindle investors love of gold for more than two minutes. Shocks are quicker than recoveries, so perhaps this will play to into the hands of gold bugs, even if stock markets are beginning to show signs of modest stability.