Here Comes Another Old Friend


WELCOME BACK - One trade that is coming back onto my radar, which has been absent for several weeks is GOLD. On Monday, the yellow metal fell hard and could now be looking for a deeper setback in the sessions ahead towards 1200. But I don't think we see a dip back below 1200 and instead, I like the market being well supported ahead of the barrier, ideally in the 1215-1225 zone. Technically speaking, this is a market that has seen its share of sharp pullbacks in recent years. At the same time, since bottoming out in 2016, setbacks have been very well supported, no matter how intense. If you look at the chart, since bottoming in 2016 ahead of 1100, we've seen a pattern of higher lows and higher highs. So technically, this setback is just corrective ahead of what should be renewed upside.

 

THE WHY - Fundamentally, it's hard to see GOLD losing appeal in the current environment. We've been hearing a lot about an expectation that exceptionally subdued inflation will start to once again trend higher. Gold has always been a traditional hedge against rising inflation. Of course, this is a medium-term view and not something that will necessarily materialize over the coming days. Still, we are at a point on the inflation curve where that next big move is up. Moreover, with geopolitical risk on the rise and with the market starting to rotate away from the US Dollar, these are only added variables that should support the hard asset. Of course a falling equity market would also be supportive though at this point, that conversation can't be had. 

OVERLAY - So the idea of buying GOLD is there and it's just a question of waiting for the right opportunity. As always, timing is everything. Let's see if something comes our way this week. There are certainly plenty of potential catalysts, with tomorrow's Fed decision easily one of them. OnE final thought for today. Two of the most subdued charts out there right now have got to be the VIX (volatility index) and inflation as reflected through US core PCE. You don't usually hear people talking VIX and core PCE in the same sentence, but given the fact that both of these charts must look quite similar, I'm wondering what if there are any insights we might get from taking a closer look at such an overlay. I'm going to investigate and will let you know if I see anything.

Just because the Euro and Sterling outlooks are constructive doesn't mean we can't see weakness. Via @joelkruger

FX INSIGHT - As far as FX goes right now, I have said I'd like to buy EURUSD or even GBPUSD into that next big dip. But with these markets holding up, there may even be a chance to sell into one more push before they begin to correct. The core view for EURUSD and GBPUSD right now is constructive (ie higher). Both markets took out major resistance points in April, with both now showing very clear signs of meaningful bases against the US Dollar. But this doesn't dismiss the fact that we still could see pullbacks on a short term basis. With that said, if we don't pull back and instead see an extension of this recent run, I will be happy to also take a shot at fading the strength for that short-term reversal. I still think the Euro can trade back down towards 1.0700 before pushing to 1.1400, while GBPUSD has room for a drop towards 1.2500 before testing 1.3500. As far as sell levels go, it's too early to isolate, but stand by. 

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