Gold: Is $1,900 The Target Again After Slide In Dollar, Bond Yields?

An unexpected break for gold from the heady dollar of early May has helped longs in the yellow metal find their feet after a four-week rout. 

The question is will that reprieve help them find their way back to the bullish $1,900 mark and above seen over the past three months.

Gold’s highs ranged from $1,976 to $2,079 between February and April, before hitting a four-month low of $1,785 on May 16.

In Tuesday’s trade, front-month gold futures for June on New York’s COMEX settled at $1,865.40 per ounce, up $17.60, or almost 1%, on the day. Earlier in the session, the benchmark gold futures contract scaled a peak of $1,868.80—its highest in two weeks. 

What’s more, June gold managed to stay in the green for a fourth session in a row, its longest since a five-day winning streak between Apr. 7 and 13 that coincided with Tuesday’s two-week high.

While gold retreated a little in Wednesday’s Asian trade to hover at below $1,859, its current trajectory has put it on track to regaining the $1,900 perch—even if just momentarily, said Sunil Kumar Dixit, chief technical strategist at skcharting.com.

All charts by skcharting.com

Gold’s daily and weekly stochastics are supportive of an up move targeting the 50-Day Exponential Moving Average of $1,884 and the 100-Day Simple Moving Average of $1,886, as well as the weekly middle Bollinger Band of $1,890, said Dixit.

“Overall, gold is very likely to test $1,885-$1,900 and the rally is likely to extend to $1,910 which is a caution level for the bulls,” said Dixit, who bases his calls on the spot price of bullion.

But gold could weaken as well, especially if it had a weekly close beneath $1,850, said Dixit.

“If that happens, it could lead to a short term correction of between $1,838 and $1,825. In any event of a correction, the 200-Day SMA of $1,839 can act as strong support. But if the selling persists, the downside can extend to $1,815.”

Ed Moya, analyst at online trading platform OANDA, held a similar view.

“Non-interest bearing gold is a safe haven again and it could be on the verge of a major breakout if prices can recapture the $1,885 level,” said Moya.

“A peak in Treasury yields is in place and now the dollar looks like it is ready for a pullback as the ECB is ready to raise rates which is good news for the euro.”

He said gold should remain supported as inflationary pressures weigh, China’s Covid situation remains a big unknown, and corporate America continues to slash outlooks.

“There might be no stopping gold right now as the wall of worry on Wall Street continues to grow,” said Moya.

“The US economy is not falling apart, but the weakness it is experiencing is much worse than many expected.”

The “worse” is in the form of bad news on the economy, which seems to be getting a little ‘badder’ each day.

One indicator of that worry: Data from the Commerce Department on Tuesday showing monthly sales of newly-built US homes falling to a two-year low in April, reinforcing the notion of a housing market slowing from surging interest and mortgage rates.

The new-home sales numbers came on the heels of data from last week that showed sales of existing homes in the US down for a third straight month in April as interest and mortgage rates rose. Prior to that, the National Association of Home Builders said homebuilding sentiment—a gauge of domestic construction activity—hit two-year lows in its early survey for May.

Housing and real estate have important roles in the US economy, with roughly 65% of occupied housing units being owner-occupied and making homes a substantial source of household wealth and home construction a key provider of employment. In the 2008/09 financial crisis, a crash in the housing market precipitated what later came to be known as the era of the Great Recession.

However, the bad news for those bearish on gold is that the Federal Reserve doesn’t seem to be taking the deteriorating news on the economy too badly. The central bank is most likely sticking to a half-point rate hike in June instead of a three-quarter point increase that would have taken the yellow metal’s implosion to the next level.

That has allowed the Dollar Index, gold’s nemesis, to slip from the 20-year highs above 105 in early May to a little just above 101—a drop of more than 3%. Bond yields, measured by the Treasury’s 10-year note, have also been plunging, dropping almost 3.7% just on Tuesday alone and heading for a third straight week of losses. That’s good news for bullion’s bulls.

“Gold is in a great space at the moment with almost all supporting markers favoring the yellow metal,” precious metals analyst Warren Venketas wrote in a blog that appeared on the DailyFX platform on Tuesday.

Pointing to a third straight monthly decline in the US 10-Year TIPS (Treasury Inflation-Protected Securities), Venketas said gold’s upside was due to its inverse relationship with the so-called TIPS instrument, which has reduced the cost of holding the yellow metal.

Interestingly though, Venketas isn’t calling for an outright build in long positions of gold. Adding:

“Technically, gold price action has confirmed its place above the $1,850 psychological level after yesterday’s daily candle close above this resistance zone.”

“I would be hesitant to favor a long preference just yet, leaving today’s candle close that much more important. This close coincides with the 200-day SMA, and a strong push higher could establish the indicator as support going forward.”

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Disclaimer: Barani Krishnan uses a range of views outside his own to bring diversity to his analysis of any market. For neutrality, he sometimes presents contrarian views and market variables. He does not hold positions in the commodities and securities he writes about.