There is plenty of short covering going on in gold trading for the second consecutive day on Wednesday as the technical outlook for the yellow metal continues to improve. After gold advanced back above $1,100/oz on Tuesday, it was once again seeing demand on Wednesday morning, touching a 3-week high above $1,115 per ounce.
At least two reasons are driving the current rally for gold prices: 1) investors seeking safe haven from the rout in China and the devaluation of the Chinese currency; and 2) buying momentum as prices quickly recovered from weeks spent in the doldrums.
On the technical side, a drop for the dollar on two consecutive days is helping lift gold prices, as well. Many would expect the opposite to be true of the Greenback considering the dramatic slide for the yuan this week, but an interesting development in the foreign exchange market actually bucked this expectation. Because there were so many open contracts in the euro-yuan carry trade, traders had to purchase euros in order to cover their positions as the yuan fell. This trend coincided with the announcement that Greece and the EU had reached a bailout agreement, sending the euro surging even higher. As the euro is the most heavily weighted of the currencies against which the dollar is valued, the break-out for the EU’s common currency undoubtedly dragged down the dollar. The relationship between the euro and dollar is so strongly inverse, in fact, that the comparative chart below shows they almost perfectly mirror each other’s movements in opposite directions.
As recently as July 20, spot gold had sunk as low as $1,070/oz, a five-year low. After surging back above $1,110/oz this morning, gold has shown no signs of slowing up, pushing as high as $1,117 per ounce by 10 am EST. This has lifted the trend chart of the gold price out of its bear pennant, as technical analysts might say. While the “bear pennant” signals a probable drop in future prices, a break above this pennant or triangle in the technical chart could spell an uptrend for the precious metal.
Conversely, the Dow Jones Industrials have been mired in sluggish trading lately, dragging the stock index below 17,500 after reaching above 18,100 as recently as July after trading above the 18,000 mark since March of 2015. The slide for the Dow has actually pushed its 50-day moving average below it’s longer run 200-day moving average; technical analysts call this crossing of the 50 DMA below the 200 DMA as the “death cross,” as it almost invariably indicates a break even lower. The last time the Dow Jones exhibited this technical trend was in December 2011, when the index indeed dipped by more than 10%.