Monthly Precious Metals Technical Analysis Report - June 2020

Gold – In Brief

Gold made an uncertain start in June, hitting cloud base support and then making a steady climb to end the month on the highs, as bond yields declined, equities gave up some ground and the Dollar Index recovered in a generally ‘risk off’ environment. The upward surge in Coronavirus continued to make headway in the US in particular, and politically, you might make the observation that if certain voters had rejected bloodless ‘managerialism’ in the last few years, then they certainly got what they asked for.

The chart to the left shows that although the EFP and volatility remain elevated, there is a relative return to normality in the spot-futures linkage with rallies in the spot producing less of a premium on futures. The chart on the right suggests that fiscal and monetary measure to counter the impact of CoVid 19 will continue to support gold.

Money and Interest Rates

The discussion around latent inflationary pressures continues: will the increased dollars circulating through the system be spent, or hoarded?

It depends largely on how persistent unemployment is (especially as government support for businesses and individuals is removed over time) perceptions of  job security, and wealth effects that stem from how deeply the housing market is affected, given that for most people that is their single most important asset. So far, inflation expectations remain weak.

Quick Overview of Managed Money Positioning in Gold

After decreasing quite sharply, Managed Money gold longs have returned quite aggressively. The average roll cost between the front month and the next active month has stabilised so that the spread averages at just over US$14. This compares with an average in the period July 2017 to mid-March 2020 of around US$10. So, funds are perhaps quite sanguine about the additional cost of rolling their positions forward on the basis that it won’t really impact their total returns.

Gold Positioning and Volume-Weighted Average Pricing

There is a still net outflow from the CME over the observed period, however longs have re-established positions aggressively over the latter part of June. The increase in open interest since Tuesday the 23rd is not that large, which suggests that recent shorts in the table below have bought back their positions, which acts to offset the expansion in open interest as new longs join the market.

Weekly Ichimoku Cloud Chart

The mid-month dip in prices was supported near the Turning line, with the price closing above that level, and never looking back. Support at US$1729 and… US$1618.

Daily Ichimoku Cloud Chart

It looked as if the breakout from the pennant was some kind of mistake but eventually the price took support from the Daily cloud top and rallied. Once above the Turning and Standard lines, those levels have provided good intraday support.

Gold Daily Point and Figure – Long Term

Whichever way you slice the long-term point and figure charts, there is a real absence of targets between current price levels and US$1930 (which doesn’t even make an appearance on the US$15 box size version below).

Either the gold price has to fill that large gap between the current targets, which have been reached, or there is a sizeable chance of a pause in the current upsurge.

Gold Hourly Point and Figure – Medium Term

Using a box size optimised for recent volatility, upside targets appear to form two bands, one straddling US$1800, which might be brief, and one in the US$1827-1837 area.  

Price Targets via Point and Figure – Short Term

The market did drop to the targets around US$1672 in the previous report and has now converged on the US$1784-1785 targets.

Decent-looking support in the US$1770-1774 range basis the congestion visible below. The break-up out of that area looks really positive.

Inflation-linked bond yields & gold

The inflation-linked yield continues to decline, helping gold upwards. The yield curve/gold relationship may tell a different story, that gold can do well as the curve returns to positive territory, not because the positive tilt signals expected growth, but more the increase in M1 flattening near term yields.

The relationship still holds well. Regressing gold prices on the yield shows that the inflation-adjusted yield can explain about 75% of gold’s moves.

Gold-Silver Ratio

A strengthening bias to 94 before gold outperforms again.

Silver Weekly Ichimoku cloud

Bullish basis the weekly cloud – but also within the range of the past 3-4 years. Supports US$17.75 / 16.97 / 16.54.

Silver Daily Point and Figure – Long term

More targets emerging to US$20-21. Managed money longs are increasing slowly.

Equities - the SPX

Worsening Coronavirus conditions finally overcame positive sentiment arising from massive fiscal and monetary support.

Support at 2,999 from the Weekly Turning line, 2,970 from the Weekly cloud base and 2,793 from the Weekly Standard line. A break of the weekly cloud would target 2,620.

SPX Daily Chart with Targets

The slight fade alluded to in the May commentary saw the SPX retreat to Weekly Turning Line support quite rapidly. The major trend remains bullish, but the existing column is bearish. The remaining upside targets outnumber the downside target 4-1, so it is hard to argue against the recent trend, but…

The Dollar – DXY

Strong support at 96.40 initially and then 95.70 once the weekly cloud support was breached. The recovery is now running into resistance at the Weekly cloud. More bad news on the Coronavirus front should support the dollar. Point and Figure has scope for a rally to 100.42.

AUD Weekly Cloud

The AUD rebound has spent the whole of June being thwarted by the Weekly Cloud. There is a significant amount of option gamma locally with 0.69 and 0.6995 strikes in particular helping to keep the AUD in a narrow range. RBA expected to cap above 0.70. The fundamentals are certainly good basis recent trade figures and the impact of coronavirus on rival exporters. That makes it harder to do the obvious which is to suggest a move back to 0.67 and 0.63.

The AUD Hourly Point and Figure

Much less clear than last month, with additional upside and downside targets. Tend to think any rally will be capped around 0.7135.

Where to from Here?

The gold market continues to look strong from a technical aspect, and recent behaviour in treasury yields is supportive of gold. Targets suggest a push through US$1800 to US$1860-1880.

However, a cautionary note on the technicals: There is a large gap in targets between current levels and the US$1880-1920 levels & beyond. If momentum weakens, expect a re-test of supports as some profit-taking emerges.

In the short term, the recent boost given to gold from option gamma in the run-in to month end, and the presence of a decent close for quarter-end could see a short-term stall within the very bullish framework, which is playing out slightly going into July.

Physical markets in Asia continue to be dominated by scrap outflows and a weak Chinese market, hampering physical demand. The AUD rally looks as if it has run ‘most’ of the way, and this may provide support to AUD-denominated gold and silver in July.

Resistance

US$1912	2011 High
US$1864	Target on Hourly Point and Figure
US$1802	Target on Hourly Point and figure

Supports

US$1746.00	Mid-to-late June supports
US$1730.00	Weekly Turning Line
US$1620	Weekly Standard Line
US$1519	Weekly Cloud Top
US$1440-50	Band of support November 2019, successfully tested March 2020

Targets (Upside)

All target probabilities basis spot US$1,780 for 3 months

US$1896	Hourly Point and Figure (0.21 % Log)	27 %
US$1864	Hourly Point and Figure (0.21 % Log)	33%

Targets (Downside)

US$1700

1-minute Point and Figure (US$1 box size)

28%

 
Until next time,
 
Nicholas Frappell
Global General Manager
ABC Bullion
 

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