Gold Breakout Coming? What Would It Mean For USD, Bonds?
(Kitco News) - With gold trading near key psychological resistance at $1,300 an ounce, one analyst says the metal looks ready to breakout.
But, instead of focusing on the yellow metal, Blake Morrow of Forex Analytics looked at what effects a breakout in gold would have on other assets closely related to the metal.
"[T]he market is like a set of dominoes' and as one asset class makes a move, sometimes it can provoke others to do the same," he wrote in a blog post Thursday.
"Gold is at a major inflection point, and with big risks looming at the end of the week, the risk is that gold breaks a multiyear trend line."
Gold prices have fallen to key support levels after hitting a seven-month high mid-week; August Comex gold futures last traded at $1,280.10 an ounce, down 1% on the day.
"Gold has broken the $1280 level, but has rejected the horizontal resistance (thus far) at the $1295 level. A breakout above $1300 is really going to put some upside momentum on the beleaguered shiny yellow metal," Morrow said.
However, Morrow turned to the U.S. dollar and bonds to see what effects a breakout in gold could have on these markets.
Given the dollar's inverse correlation to gold price, he said he would expect the greenback to move lower on a breakout.
"The US Dollar Index has been beaten down since the beginning of the year. Some major false breakouts as many traders/institutional players thought that the U.S. Dollar was going to soar as interest rate differentials diverged between central banks," he said.
"The DXY is almost at the major 61.8% Fibonacci retracement level which seems to be holding at the moment. But what if gold breaks higher? The risk to the US Dollar is that we could take out this support, which would be interesting as it seems many traders have been attempting to play a dead cat bounce' in the US Dollar in recent days and weeks."
On bonds, Morrow said he expects the market to be driven higher by a rally in gold prices as both markets are positively correlated.
"The point being, that gold is nearing a breakout point. If it breaks and closes above the $1300 level at the end of the week, the DXY may come under pressure as bond yields drop. Bonds would be higher as a result," he explained.
By Sarah BenaliFor Kitco News
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