Gold Tests $1,400 Breakout

Last week was a volatile week for gold bullion which held near $1,400 per ounce. Gold was relatively steady despite the higher than expected U.S. June jobs growth reported by the U.S. Bureau of Labor Statistics on Friday. The week provided some opportunity for profit taking in the yellow metal, which has climbed approximately 19.25% since its 2018 low of $1,175 (8/16/18) and 9.11% YTD through Friday’s close. Given the Fourth of July holiday-shortened week, trading volumes were thin and volatility was likely overstated. June’s jump in job growth will not reverse our bullish outlook for gold, given that lower bond yields have been in place for several months, and the global bond market continues to price in a new easing cycle.

To recap gold’s positive trend over the past few weeks, gold trading above the $1,370/80 per ounce level verifies a critical multi-year base breakout (see Figure 1). Gold’s rise has been impressive as multiple assets have corroborated the move, and the price action on many gold-related assets has been emphatic. The U.S. Dollar Index (DXY) broke below its 200-day moving average and bond yields declined across the board. The U.S. 10-year Treasury yield traded for several days below the important 2.04% low yield last seen in 2017. The German Bund 10-year yield continued to plunge and printed a new low of (0.36)% last week.

Figure 1. Gold Price Breaks Through Previous Resistance Levels

Source: Bloomberg as of July 5, 2019. Gold spot price based on GOLDS Comdty index.

Market Inflection Point?

The sheer number of chart breaking patterns across various asset classes in the past few weeks typically occurs at market inflection points. We also saw volatility spike as the SPDR® Gold Shares (GLD) put-call ratio collapsed, indicating buying panic in gold options. Net gold exposure in the futures market and inflows into gold ETFs also affirms the bullish positioning as levels were the strongest since 2016. Gold mining equities also had intense buying action, and our money flow indicator surged. Following the June 18 Federal Open Market Committee (FOMC) meeting, the global bond market is now pricing in a new easing cycle.

Gold stocks cooled this past week after surging 20% in June. Like the price of gold, the breakout for gold stocks represents a large base breakout pattern on significant volume (see Figure 2).

Figure 2. Gold Mining Equities Breakout

 Source: Bloomberg as of July 5, 2019. Gold stocks are measured by Sprott Gold Miners ETF (SGDM).

Given the impressive gains in gold bullion and gold stocks over the past few weeks, we would expect to see some consolidation as the market absorbs and digests this latest price action. In the weeks ahead however, we believe that the market will continue to price in lower interest rates. Equity markets are recovering to new highs despite negative news as the “Fed put” has resumed.

Market Leadership Takes on a Long Duration Theme

Leadership has taken on a long duration theme as technology, utilities, staples, real estate and gold sectors are outperforming. Commodities hover near multi-year lows as economic weakness is likely to worsen before it gets better. Meanwhile, German Bund yields are set to become more negative, and the amount of negative yielding bonds worldwide is set to surge (see Figure 3). Gold as a zero-yielding asset will look even more attractive versus an asset that is guaranteed to lose money.

Figure 3. Amount of Negative Yielding Bonds Hits New High

Source: Bloomberg. Data as of July 5, 2019.