Revisiting the outlook for gold

Back in late January when US 10 year yields were trading just above 1%, JP Morgan hosted a client Macro Conference. A good portion of the over 3400 investors that attended, were asked to participate in a survey on market-related topics.

Gold 2

The survey revealed the majority of investors were expecting US 10 year yields to rise to between 1.25% and 1.75% by year-end. Notably, only 10% of respondents thought that the US 10 year yield sitting between 1.50% - 2.00% presented a threat to equity markets.

Here we are just 6 weeks later, US 10 year yields have already reached 1.50% and the high beta Nasdaq is almost 9% off its all-time highs. Admittedly not too big a deal in the bigger picture.

Let’s for a moment presume that those surveyed were off in timing but correct in terms of pricing. That 1.50% becomes the “new normal” in nominal US 10 year yields and that real yields remain deeply negative. It starts to shed a more favourable light on some markets including gold that have been beaten up in recent weeks.  

The break below the November $1764 low appears to have been driven by technical stop-loss selling. This is supported by Commitment of Trader positioning data that indicates ~64,000 long futures contracts have been closed since the start of the year with another decrease in long positions expected to come through in the next update.

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This “position wash” has driven gold towards trend channel support $1700/1690 area. I am watching closely for a bullish reversal type candle to form near this support area as the set up to a long trade in gold.

If gold can then break about $5.00 above the high of the bullish reversal candle, it would be an encouraging sign that that a stronger recovery is underway, initially towards $1850 with scope to trend channel resistance $1900 area.

Keeping in mind, if gold first breaks and closes below trend channel support let's say $1685ish it would warn that a deeper setback is underway towards support $1660/50 area.

Revisiting the outlook for gold

Source Tradingview. The figures stated areas of the 4th of March 2021. Past performance is not a reliable indicator of future performance.  This report does not contain and is not to be taken as containing any financial product advice or financial product recommendation

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