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Day three: our potential gold trade

After a nearly printing a bearish outside day reversal on Monday, gold continued to sell off hitting a session low of $1258. 

Gold
Source:Bloomberg

Following on from my potential trade idea yesterday, buyers came back into gold in a big way and as you can see from the daily candle printing a hanging man pattern.

I have looked at buying GBP/AUD and selling rallies in EUR/GBP in today’s trader radar, but for me I am fairly neutral on gold at current levels. The strong buying seen in gold after the strong US CPI, which at +2.1% was the largest year-on-year headline rise in 19 months, has interested me though.

At 04:00 AEST we get the FOMC meeting and 30 minutes later Janet Yellen’s press conference and depending on what is said should determine how assets like the USD, US treasuries and gold trade. It’s worth highlighting that gold is actually trading independently of these assets and is expressing very little in the way of correlations. The correlation with the US dollar index is at 0.2 (or 20%); this was at 0.8 in Q4 2013.

There are emerging signs that inflation is increasing in the US, although it’s hardly high enough to say we need to hedge this risk through gold. Still we are coming to a time when the Fed is having a more heated debate about raising the Fed funds rate, which could have sizeable ramifications on gold.

From a pure momentum perspective traders could favour buying spot gold on a break of $1286 to $1283, which as you can see is the confluence of resistance, being the 55-, 200-day moving average and downtrend resistance drawn from the April 14 high.

Spot Gold chart

Spot Gold chart

Spot Gold Chart

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