Gold trades to its highest level of 2020, and then closes lower on the day

Although gold futures hit a new yearly high of $1788.60 in trading today, as of 4:48 PM EST gold futures are currently down by $5.40 and fixed at $1755.90. The lower pricing is occurring during a day of dollar weakness, with the U.S. dollar index currently down almost ½ % (-0.49%) and fixed at 98.85.

There is also a disconnect between gold futures and spot pricing today where spot gold is currently trading up by approximately .80%, and fixed at $1725.77. Recently we have seen the spread between gold futures and spot pricing getting wider as futures pricing was consistently gaining more than spot on trading days which resulted in higher pricing for both, as well as trading days in which futures and spot pricing were lower on the day. It is unusual that there is such a divergence between spot and futures pricing.

Currently there is approximately a $30 differential between spot and futures pricing. This spread was his wide as $60, however today’s moderate gain in spot pricing in conjunction with gold futures fractional decline that spread has narrowed by approximately $18.

That being said gold has increased in value by almost 20% this year alone, and continues to be acting as a safe haven asset class should. Recent action by the Federal Reserve continues to weigh heavily on market sentiment as Fed cut rates to nearly zero, and reignited their monetary policy of quantitative easing.

The recent action by the Federal Reserve has also boosted bullish market sentiment into the U.S. equities markets which have seen dramatic gains over the last week and a half in trading. The NASDAQ composite gained almost 4% in trading today, but more importantly closed above its 50-day moving average. This is the first occurrence of the NASDAQ trading above the 50-day moving average since the third week of February. The Dow Jones industrial average gained 2.39%, or 558.99 points in trading today and is now fixed at 23,949.76 points.

Both the Dow and the S&P 500 are still trading below their 50-day moving averages. It is the belief of many analysts, including myself, that the real economic fallout has not even begun. This fallout will last much longer than the pandemic itself as central banks globally have all dramatically lowered the interest rates, as well as create and implement a $2.3 trillion lending support package.

According to MarketWatch, “Ryan Giannotto, director of research at GraniteShares, which offers a Gold Trust, said the “primary factor at work in the gold market” is the U.S. Federal Reserve’s expanded lending and asset purchasing program announced last week.”

He also said that “This latest facility on behalf of the Fed, not only allows the central bank to purchase junk bonds, but it is the largest money printing event in human history. These developments catalyzed gold’s close above $1,700, and the metal is rallying further.”

Another interesting aspect is that of all the precious metals traded in the futures complex (gold, silver, palladium and platinum) gold is the only precious metal to be trading lower on the day. Platinum gained over 9% in trading today, and after factoring in today’s gain of $69.90 is currently fixed at $1819.40. Silver gained a respectable 3.27%, with May silver futures closing above $16 ($16.045) per ounce after factoring in today’s gain of almost $0.51. Palladium gained 1.22%, a $26.40 gain, and remains the highest priced precious metal traded on the futures exchange. Palladium is currently fixed at $2197.10.

While our long-term outlook for gold pricing is extremely bullish, at any point we could see a correction take place. The fact that gold futures traded to a new yearly high and then closed lower on the day indicates that there are traders pulling profits from recent gains.

On a technical basis the new level of resistance is today’s high at $1788.80, with support at $1739, which is the 23% Fibonacci retracement of the most recent leg of this rally that began on April 1. Considering that gold futures have moved from a low of $1575 on April 1 to an intraday high today of $1788, the price differential is approximately $213 during the month of April. While gold has not moved up in a parabolic manner it could easily succumb to selling pressure as traders take profits on existing positions. While this could move the market as low as $1707, the 38% Fibonacci retracement level.

The financial fallout from the coronavirus pandemic will most certainly remain long after the pandemic is over which will continue to create bullish undertones for gold as well as the other precious metals.

Wishing you as always good trading,