Gold breaks above $1,300

By David Morrison  |  29/01/2019 13:18

Gold rose sharply over the last quarter of 2018 as equity markets slumped. Yet investors have continued to increase their exposure to the yellow metal even as global stock indices have bounced back since late December.
 
On Friday gold broke above $1,300 and today it has added to gains to hit its highest level in over six months. Last summer gold hit a nineteen-month low of $1,160. Back then, there were several analysts who were suggesting that the precious metal could head back to its December 2015 lows and then continue its way to a break below $1,000 per ounce. However, over the next couple of months it recovered from its heavily-oversold condition and then rallied into the year-end as global equity markets slumped. Investors were desperate to push funds into safe-havens in a move which also led to gains for both the US dollar and US Treasury bonds.

Consolidation

So far this year gold has managed to consolidate above $1,280. This is quite an achievement given the sharp bounce-back that we’ve seen in equities and other risk assets since late December. It’s almost as if investors are wary of taking the month-long ‘risk-on’ move too seriously. It could be that the dovish rhetoric from the US Federal Reserve, the ECB and the liquidity injections from the People’s Bank of China have simply increased concerns over the global economic outlook. After all, why would the world’s major central banks suddenly turn dovish unless they were worried about the global economy? This is especially the case given the ongoing trade dispute between the US and China and as several US companies blame weakening Chinese demand for disappointing corporate results. Yesterday it was Caterpillar and Nvidia who cited China’s slowdown as a reason for downbeat forward guidance. This follows on from Apple’s sales warning earlier this month in which it blamed China for falling iPhone demand. We’ll see the effects of this tonight when Apple releases its quarterly update after the bell.

US-China trade dispute

Yesterday the US charged employees of Chinese telecommunications giant Huawei with breaking sanctions against Iran and the theft of trade secrets from T-Mobile. This comes as the US submitted a formal extradition request to Canada for Huawei’s CFO Meng Wanzhou, the daughter of the company’s founder, who was arrested in Vancouver on 1^st December. Investors are concerned that this will complicate the US-China trade talks which are set to begin this Wednesday in Washington.

Gold chart

Gold has broken out of a trading range which saw it stuck between $1,285 (the 61.8% Fibonacci Retracement of the April-August sell-off) and $1,295. The break above $1,300 is psychologically significant, but the big test now is if gold can push and hold above $1,306 over the coming weeks. If so, then a retest of the April 2018 highs can’t be ruled out.
 
 
 
 
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