Gold So Far Still Looking Good

The Next Test for Gold is Coming Up

This week's payrolls release will provide another (short term) test of gold's recent resilience. Usually, a little weakness is seen ahead of the report. Per experience, if the market is strong ahead of the report, it is more likely that the report will trigger a downward correction than when the market is either non-committal or weakening slightly into the release. In recent trading days, gold and gold stocks have consolidated their post FOMC gains:

Gold, August contract daily – consolidating after the quick gain following the FOMC meeting – click to enlarge.

Gold stocks still look good as well. Overbought conditions have been relieved a bit lately. Bulls will want to see the RSI on the daily chart stay above the 40-50 level on pullbacks. Likewise, the HUI-gold ratio needs to maintain the bulk of its recent gains:

HUI and HUI-gold ratio: so far, so good – click to enlarge.

From a technical perspective, the main bullish argument remains that support was first broken, and subsequently very quickly regained – marking the breakdown as false.  Also, the HUI-gold ratio has given a buy signal by breaking above its downtrend line.

A pullback that closes, or partially closes the recent gap on the daily chart would present no big problem, but the index needs to remain above the 50-dma (currently at approx 220) to keep the short term bullish trend intact.

Conclusion:

As always, it is unknowable what the payrolls report will actually look like (there is no point in engaging in guessing games on it). A report that is significantly stronger than expected will likely be a short term negative for gold, while a report in the expected range or slightly weaker is unlikely to derail the recent rally. Of course it shouldn't even matter, but with the market fixated on Fed policy and how it is influenced by employment, the report has become an important short term trigger for gold and bonds alike.

Charts by: BarCharts, StockCharts