There’s been a lot of discussion recently of the breakout in gold prices. The yellow metal had been trading in a range for the last several months, seeing resistance just under $1,300/oz and support at $1,220/oz. While I do believe the breakout is encouraging and does align with seasonality for gold, there’s one piece of data that’s yet to confirm the upside move.
Below is a chart of gold in the top panel and the Japanese Yen in the bottom panel. Looking for divergences and confirmation for gold in the yen has been an effective tool in analyzing gold prices. For example, back in late-2015 we saw a slight higher low in the yen while gold made a lower low/double bottom. Something similar occurred in late-216 with a bullish divergence in the yen. Both events led to reversals and ultimately up trends in gold prices.
More recently during the consolidation in gold this year we saw a small break higher in June for gold, but did not see a confirm in the yen, which was quickly followed by a reversal in gold prices as they remained in a range. A second break soon followed, with gold falling below the May low and many began calling for gold to make another leg lower. However, we did not see a confirmation in the lower low in the Yen and gold bounced back.
Now we have gold breaking out above the April and May highs and calls have begun for gold to quickly test its 2016 highs. Unfortunately, once again, we aren’t seeing confirmation in the yen, as the currency is still below its own 2016 high and has actually moved slightly lower since the initial breakout in gold.
Going forward, I’ll be keeping a close watch of this pair, looking to see if the yen eventually does move higher and joins gold prices in breaking out of its own respective range. Or if gold loses its strength and falls back below $1,300/oz.
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