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Gold Should Be 'Nicely' Above $1,300 By Now, What's Holding It Back? Pepperstone Weighs In

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Gold Should Be ‘Nicely’ Above $1,300 By Now, What’s Holding It Back? Pepperstone Weighs In

(Kitco News) - Gold should be trading well above its key psychological level of $1,300 an ounce right now, according to Australian broker Pepperstone. So, what’s holding it back?

“An interesting conversation I’ve been debating with clients of late is why gold is failing to find any real love and respond to the backdrop of rising trade tensions,” Pepperstone head of research Chris Weston said on Thursday. “All the while we see $11.1t of global bonds now commanding a negative yield - the highest since January 2015 – we could argue gold should be nicely above $1300 here.”

To see what’s putting a cap on gold prices, Weston looked at the U.S. dollar and equity volatility.

There is an advantage to trading gold in euros, he said while leaving little hope for gold in U.S. dollars.

“Gold playbook – gold will shine in EURs not USDs,” Weston wrote in the title of his latest research note, pointing to the U.S. dollar’s strength in light of the U.S.-China trade tensions flare-up.

“As we can see from the daily chart of the USD index (USDX) price looks to be breaking out into new highs. Consider that the EUR has a 57% weight on this basket of currencies traded against the USD, so flip the chart to EURUSD, and we see price trading into the lower limits of its 1.1260 to 1.1110 range it’s held since late April,” he noted. “A close through 1.1110 will only limit golds (in USD) appreciation, and this takes on new consideration ahead of the ECB meeting on 6 June.”

Aside from being limited by the U.S. dollar, gold has lost its relationship to the bond market, Weston added.

“Gold has diverged from its link with both the pool of bonds that have a negative yield (red) and ‘real’ US 5-year Treasuries (green),” he said. “If the bond market is failing to promote a spark in gold, what is holding it back?”

Lack of market volatility seems to be the main culprit behind a lack of positive gold price action, according to Weston.

“If we look at equity volatility (vol) we see implied vol (I’ve looked at the VIX index) in the S&P 500 still below 18%, which suggests expectations for big range expansion in price are still somewhat limited. It feels for gold to really motor on then vols need to pick up here,” he said.

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