By Giles Coghlan, Chief Currency Analyst at HYCM
Gold breaks out
The gold’s appeal has been there for a few weeks now. Technically the coiling inside bar on the daily chart was a key giveaway that gold was getting ready to break out.
Now, it was unclear which way it was going to break, but the fundamentals for gold was strong. It was this one upside bias which was why I wrote on May 7 that one option was to buy gold at market and look for a break. With a wide enough stop the thinking was that a false (downwards) break of the coil would also likely find buyers. It was unclear which way the coil would break, but a break to either side should have found buyers. The other option was to join the hordes of investors buying gold ETFs:
You could buy a gold ETF. That saves the issue of leverage if you buy in real money. Another option would be to dip your toe in here with stops below $1636 and look for the break.
Please note that whenever you see these coils forming, price is getting ready for a strong breakout:
So, for those long gold, or wanting to go long, the case for gold bulls still remains firmly in place. Here are some key reasons why the bullish case for gold remains in place:
1. Central bank rate cuts. Firstly, major central banks are cutting interest rates and all are heading to zero or lower. The Swiss National Bank, the European Central Bank, and the Bank of Japan all currently all have negative interest rates. For many countries, where inflation levels are higher than interest rates levels money, in the bank will simply lose value year on year. Therefore, investors who have moved into cash will be looking to place their cash in a safe haven.
2. Gold is a recession hedge. In the last three recessions, gold has increased in value, so as a hedge for a recession gold does have strong appeal. Check out the chart below to see gold increasing in all of the last three recessions (black column).
3. Money is being devalued. With large scale quantitative easing (QE) programmes undertaken by central banks around the world and some analysts anxious about high stock valuations, gold offers a decent hedge against such devaluing risk. This is why many analysts would recommend a portion of your portfolio being in gold. History, may not be repeated, but the fundamental outlook for gold is currently very strong. Entry in the gold market can be done via spot gold, a gold ETF, or gold mining stock.
Expect gold buyers from $1740 and below on the XAUUSD chart.
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