XAU/USD - Bears still hold the ace cards

Gold has registered a recent 7.7% loss, with gold ETF liquidation, rising real US yields and liquidation from speculative accounts
Chief Investment Office08 Jul 2022
Photo credit: AFP Photo

Chart 1

Source: Bloomberg

The month of June has not been good for gold, with a top to bottom drop of 4%, and against June’s 1878 peak, further declines has led to post a sharp 7.7% loss. The bearish path is clear as the weekly Ichimoku chart’s cloud path has turned determinedly bearish with resistance sturdy at 1880 and 1915. The measure of intermediate resistance via the Tenkan resistance is also lowered to 1809. On Chart 1, one can see bearish pressures have been augmented with the break of the trendline rising from 1690, the August 2021 lows. The break at the 1809 axis now has gold pondering for a break of the horizontal support line at 1727. There remains a risk that failure to break higher in March this year could pose the threat of a major double top signal. At this stage, we treat it as a lesser flat top resistance pattern, which is equally potent.

Chart 2

Source: Bloomberg

Gold’s supporting cast continues to show weak hands. Holders of gold ETFs (in green) are shedding longs, and so are speculative accounts (in dotted black lines). Given gold’s non-interest-bearing nature, gold’s decline (in blue) is as well choreographed by the steep rise in US 10 years real yields (in red). They all help to explain gold’s decline below the $1800 line, with a hefty $82 drop from 1814. Elsewhere, silver has done comparatively worse. Silver is posting a 15.9% rout against its June 22.51 highs. Gold’s near-term woes are unlikely to see quick fade offs, with all eyes on the July 28 FOMC, where the June 14-15 minutes shows the Fed is focussed on its inflation battle. The market expects a 75bp hike (market prices a 80% probability), further oiling the rising trajectory on the US real yields

Chart 3

Source: Bloomberg

From the monthly chart, it is clear that gold’s failure to surmount 2075 offers a flat top resistance. Gold’s current price path is composed of an ongoing 1-2-3-4-5 where we are seeing a large spanned corrective leg 4 with clear markings of the more recent decline manifesting the c leg. This thus is correcting the space between 3 and 4 via a typical abc price leg. The danger is now a break of the trend support line that rises from 1160, the August 2018 lows that would generate further capitulation risks, and opens the lower price band at 1626 as a possibility (this itself is near 1618 a Fibonacci retracement) – this requires a break of 200 week moving average at 1650. The issue is the form and substance – if we get an evolving triangle, the drop would be a “controlled decline” for 1691-1677.

Chart 4

Source: Bloomberg

On the navigation map, it is clear bears have control. Bears still hold the ace cards. The only issue at hand is whether the decline can evolve into a triangle or arrest the decline. This would imply a smaller dose of bearish pressure via the price leg of abc. The technical evidence is not there yet, so we lean on 5 waves down, and we are just in mid-stream of leg 3.

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