Gold edges towards a technical breakdown

Overnight the yield on U.S 10 Year Treasury Notes broke above the 3.00% level with conviction, hitting an intra-day high of 3.09% before closing the session at 3.07%. The move in yields resulted in another round of US Dollar strength while elsewhere, Gold fell below US$1300.00 for the first time this year.

As noted in earlier reports, interest rates in the U.S have moved steadily higher this year and with the Federal Reserve on track to hike again next month (June 12-13) followed by two more hikes in 2018, the trend of higher interest rates is likely to continue. On the other hand, Gold yields nothing. Combined with an easing in geopolitical tensions, Gold faces some headwinds.

According to the Commodity Futures Trading Commission Data (CFTC), Non Commercial/ Speculative type trading accounts have actively reduced their long Gold futures holdings by nearly 100,000 contracts from ~203, 0000 contracts in early April to ~ 107,000 contracts as of last weeks CFTC update. Keep in mind, Gold acts as a proxy hedge in some portfolios, hence it is unlikely that the CFTC report would ever reveal a net short Gold position. That said there is certainly room for further position liquidation should the price of Gold continue to decline.

From a technical point of view, Gold as viewed on the weekly chart below has repeatedly been unable to break through the band of resistance in the US$1365/1375.00 area. There is now early signs of price rejection from this region as well as a double/triple top.

Drilling down on the daily chart viewed below, Gold until yesterday had spent the entirety of 2018 trading in a range between $US1365.00 and $US1300.00 on the downside. Yesterdays break and close below U.S$1300.00 is an initial indication that lower prices are likely. Further confirmation would be a daily close below the trendline support $1285.00 area. This would then indicate a move towards the 50% retracement as well as the Dec 2017 low in the $1245/1235 zone is underway.

To express this view as a trade, I will look to establish a small short position in Gold on a bounce back towards the $US1296/1301 region with my stop loss placed above US$1322.00. I would then like to add to this position on a close below US$1285 before lowering the stop loss on both short positions to $US1310.00. The profit target for the short trade is the previously mentioned US$1245/35 zone. As is my preference for exiting profitable trades, I will scale out of some shorts ahead of interim support at $US1365.00.

Source Tradingview. The figures stated are as of the 16th of May 2018. Past performance is not a reliable indicator of future performance. This report does not contain and is not to be taken as containing any financial product advice or financial product recommendation

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