Gold consolidating and moving to test key support…again

The extended consolidation phase for gold has continued once again this week with no end in sight just yet, and with bond markets now in turmoil many of the traditional relationships are breaking down or have already decoupled. In answer to one of the questions from the floor yesterday Yellen said..

“I guess I would highlight that equity valuations at this point generally are quite high. They’re not so high when you compare the returns on equities to the returns on safe assets like bonds, which are also very low but there are potential dangers there.”

These comments added further uncertaintity to an already confused situation, with bond yields rising sharply and the US dollar continuing to remain under pressure, and gold now falling along with equity markets in early trading.

As traders we sometimes forget there is in fact one market that has the power to overwhelm and terrify just about anyone in the financial markets, and a famous quote by James Carville (a member of Clinton’s administration) says it all.

“I used to think if there was reincarnation, I wanted to come back as the president or the pope or a .400 baseball hitter. But now I want to come back as the bond market. You can intimidate everybody.”

So the recent move higher in yields in both the 10 year German Bund and Treasury is something we need to pay close attention to. However, these moves have had many commentators scratching their heads, as any rotation out of bonds (safe haven) can herald an early move into risky assets (such as equities and/or commodities). Moves in yields can also be an early indicator of shifts in central bank monetary policy, interest rates and inflation, and by definition are therefore one of the key drivers of exchange rates.

The current situation is very early doors, but to take one example – the yield on the 10yr Aussie has moved above 3% since December last year and can be said to be a significant factor in supporting the Aussie dollar. This despite RBA’s Glen Stevens saying the Aussie is overvalued against the USD. But when the bond market speaks, even central bank governors have little or no control over what may happen.

Ultimately, all markets are about money flow & the forex market is the conduit through which it all flows, which is why it is so sensitive to any unusual or unexpected change in sentiment. Now the big question is where is the bond money going? Apart from being stuffed under virtual mattresses – there is nothing to suggest it is moving into equities, or indeed any other asset at present and certainly not gold.

From a technical perspective the key level on continues to be the $1172 per ounce platform of support which remains firm on the daily chart, and denoted with the blue dotted line. Overhead, the resistance region at $1215 per ounce defines the ceiling of the current congestion phase, and with the weak move higher earlier in the week on low volume now apparently over, and with this morning’s price action breaking through the $1190 per ounce area once again, a test of the $1172 per ounce region now seems likely. Any move through this region will then open the trap door to a sustained and longer term move lower for gold.

By Anna Coulling

Charts are from NinjaTrader and the trading indicators from Quantum Trading.