Gold update

By David Morrison  |  01/02/2019 15:31

After breaking above $1,300, gold rallied sharply. It looks as if further gains are likely, although it currently appears overbought

Gold closed above $1,320 yesterday to hit its highest level since April last year. The precious metal has put in an impressive recovery since last August when it traded at a nineteen-month low of $1,160. Gold had come under selling pressure between April and August last year as equities bounced back following a sharp sell-off in early February. This helped to boost risk appetite and reduce interest in gold. On top of this, the US dollar rallied putting further pressure on the dollar price of gold.

Oversold and under-owned

Last summer gold was oversold and under-owned. It rallied modestly over the next couple of months, but the buying only really kicked in from mid-November. This was when the equity market sell-off was accelerating and panicked investors were desperate to get funds out of global stock markets and into safe-havens. But what is interesting is that gold has continued to rise even as risk assets have bounced back. The S&P 500 has had its best January in 32 years, having just suffered its worst December in 100 years. Such a turnaround should have led to traders and investors cutting their exposure to gold as they piled back into equities. But that just hasn’t happened. Another interesting fact about this current move in gold is that it comes despite very little movement in the US dollar. Gold is up 13% since August whereas the Dollar Index is down just 1% over the same period and the EURUSD has barely moved.

Concerns persist

So, gold remains in demand despite a flat US dollar and growing risk appetite for equities. What could be driving it? Well, it was certainly oversold back in August, but it really needed the October-December stock market sell-off to trigger bullish interest. And while we’ve seen a strong recovery in global equities, there are still plenty of concerns as far as investors are concerned. For a start, global growth is slowing sharply, and recession fears have risen.  Added to this is the dovish pivot by the US Federal Reserve which is helping to keep a lid on the dollar. Then we have the ongoing US-China trade dispute. It feels as if investors have woken up to the fact that it doesn’t harm to have a bit of exposure to gold in one’s portfolio. But the question now is if the rally has further to run?

Gold chart

As we can see from the daily chart, gold has surged above resistance around $1,306. Looking at the Relative Strength Index, it has gone from oversold in August to overbought now, with a slight negative divergence. That’s not to say that gold can’t continue to push higher from here, but it may need to experience a pull-back and/or consolidation before it does. In terms of support, $1,306 is the first level although $1,285/95 is a bigger and more important area. But if this overbought condition resolves itself over time without any serious pull-back, the big upside target is the April 2017 high above $1,360.
 
 
 
 
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