After several grueling weeks of decline, the price of gold finally has a chance to rally in the weeks ahead. While the yellow metal still hasn’t technically confirmed an immediate-term bottom, the technical and market sentiment backdrop for the metal has improved enough to justify a rally. In today’s report we’ll go over the factors which are lining up in gold’s favor, as well as the remaining factors needed to confirm a price low.
Gold was down by 0.20% on Friday after nearly touching the technically significant 15-day moving average in the previous session. Nonetheless, bullion registered a small weekly gain amid escalating U.S.-China trade tensions. This was a tiny victory, but a sign nonetheless that the bulls are trying to put the brakes on gold’s latest slide.
Meanwhile the dollar fell after data showed the U.S. unemployment rate increased and wages grew in June even as the U.S. economy created more jobs than expected. Of significant, the U.S. dollar index (DXY) has fallen in each of the last four trading sessions and finished last week decisively under its 15-day moving average. This was the first time since a month ago that the dominant immediate-term (1-4 week) trend line was violated. It’s also the biggest amount in which the 15-day MA has been broken since March. This holds technical significance for gold since decisive weakness in the dollar index typically precedes rallies in the gold price.
It’s also worth noting that U.S. tariffs on $34 billion worth of Chinese goods took effect on Friday, while China's commerce ministry retaliated with 25 percent tariffs on $34 billion worth of U.S. imports. Equity markets ignored the imposition of the tariffs, with stocks edging higher for the second consecutive day. As I’ve previously emphasized, a relief for equity markets from trade tariff fears should bode well for gold since it should reduce safe-haven demand for dollars.
Although gold remains under some pressure in early July, the leading factors discussed above are pointing to better times ahead for the metal. June in particular was a bad month for gold, as gold-backed ETFs experienced outflows in North America and Asia, as a strong dollar depressed the gold price. According to a July 6 World Gold Council report, North American investors sold 44.4 tons of gold-backed ETFs worth $1.9 billion last month, compared with outflows of nearly 30 tons worth $1.2 billion in May.
The U.S. dollar, by contrast, rose to a one-year high last month as investors sought refuge in the greenback as global trade tensions between the U.S. and China increased. As we discussed in previous commentaries, investors liquidated gold holdings to cover losses in emerging market stocks and other assets that were directly impacted by the tariff disputes.
The extent of gold’s June decline can be seen in the graph of the heavily traded iShares Gold Trust (IAU). While the IAU remains under its 15-day moving average, it will likely make another rally attempt this month fueled by the dollar’s latest pullback. We need to see a 2-day higher close above the 15-day MA, however, before an immediate-term (1-4 week) bottom has been confirmed for the gold ETF.
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