Gold price action

The metal bottomed out at $1122 in December 2016 and clocked a high of $1295 in April. The subsequent sell-off to $1214 was short-lived as prices regained the bid tone and rose back to $1296 levels (June 6 high).

What’s behind the gold rally?

Low bond yields - The government bond yields across the globe have been steadily losing height across the advanced world. The 10-year US Treasury yield hit a seven month low of 2.13% on Tuesday.

Moreover, the flattening of the yield curve weighed over the US dollar over the past few months. The difference in yield between two and 10-year Treasury notes narrowed 2.9 basis points to 84.71 bps on Tuesday, its lowest level since October 3.

Geopolitical tensions - Gold has regained its safe haven appeal this year, said James Hughes, Chief Market Analyst at GKFX on our finance show this week. We cannot agree more. The uncertainty on account of Russia-US scandal, Comey testimony and tensions in the Middle East forced investors to pour money into the yellow metal.

Wires are also citing UK election uncertainty as one of the reasons for the strength in the metal. However, we beg to differ, because the British Pound has not really suffered any losses in the run up to UK elections. Corbyn may have gained the ground in the polls, still, there is consensus that PM May is likely to come out victorious in the June 8 elections. Panmure Gordon, Senior Market Commentator David Buik told Tip TV on Tuesday that he expects a ‘modest Tory majority’ in the elections. Chief Economist Simon French also echoed similar sentiments.

The whole point of discussing this is to warn investors that UK election uncertainty has played a very little role in boosting gold prices. Hence, May’s victory may not yield a big pullback in the metal. On the contrary, a hung parliament or Corbyn shock could increase demand for the yellow metal.

What do the charts say?

Monthly chart

• On the monthly chart, we have a major bullish breakout. The trend line sloping downwards from 2011 high and 2012 high has been breached, although going by the textbook rules the bullish breakout would be a done deal only if June’s close is above the trend line hurdle.
• The odds of an extension of the rally to $1337.34 (Nov high) and $1375 (resistance offered by the trend line sloping upwards from Sep 2005 low and Oct 2008 low) are high, given the higher bottom formation and a bullish RSI.

Daily chart

• The metal has retaken the rising channel.
• The RSI is yet to overbought territory, which suggests potential for a further rally in the metal.
• The channel resistance is seen around $1330 levels.

Daily chart - Murrey Lines

• Murrey math lines comprise of 9 equidistant lines which run parallel to one another. MM lines from the bottom are at the levels 0/8, 1/8, 2/8, 3/8, 4/8, 5/8, 6/8, 7/8 and 8/8. 0/8 is the oversold line and 8/8 the overbought line.
• The oversold and overbought lines are harder to cross and the majority of the times, the crossing triggers a trend reversal.
• On our chart, the price is trading between 6/8 and 7/8 line i.e. we are well short of the overbought line - 8/8 seen at $1312.50.
• As said earlier, the RSI is yet to hit the overbought territory.
• Overall, it appears the metal is on track to test the area around $1310-1320 levels.