Thanks to soft U.S. economic data of late, expectations about an aggressive rate hiking cycle by the Fed has diminished. This has weighed heavily on the U.S. dollar, underpinning the likes of the euro/U.S. dollar (EUR/USD) currency pair, gold and undermining the likes of the USD/JPY and USD/CHF. Equity markets are lower today but still remain near record high levels across many countries. But after recent sharp gains, they do look vulnerable for a sharp sell-off due above all to the impact of profit-taking as we move into the summer months, a seasonal period when stock markets tend not to perform very well.
So far, equities have avoided suffering any sizeable sell-off, partly reflecting the lack of any major risk-off catalysts. But judging by what gold is doing and given the low VIX levels, complacency among stock market bulls appears to be high. Gold is approaching its yearly highs and this may suggest we are heading into a period of risk-off. Given the upcoming risk events, we wouldn’t be surprised if this were to happen. Sentiment could turn sour for example on the outcome of the UK elections, former FBI Director James Comey’s testimony or as a result of the European Central Bank and Fed policy meetings.
As far as gold is concerned, well it could definitely benefit from a risk-off event, but this is not always a prerequisite for it to rally. It can find support from other sources, including the ongoing dollar weakness, but also from physical supply and demand dynamics. The latter is difficult to measure, as there are so many variables to consider. As a result, we, like many others, tend to let the chart show us the net impact of all the variables affecting its price. On that note, the chart of gold is looking golden at the moment.
In fact, the yellow precious metal could be about to sharply extend its ongoing rally now that it has made a significant long-term technical breakthrough. As can be seen from the weekly chart, the long-term bearish trend line that had been in place since the year 2011 has broken down. This could pave the way for significant long-term gains. A decisive break above the last swing high at $1295 is what the bulls want to see now. The bears, meanwhile, would want to see a false break here and a return back below the broken trend line. As things stand, the bulls have the upper hand and they could gain further control if that $1,295 per ounce level breaks.