(Kitco News) – Gold prices seem to be off to a good start this year, and one New York-based investment bank now questions whether or not the yellow metal may be gearing up for a breakout move higher.
In the first week of January, gold has posted gains while seeing more safe-haven buying and short covering on unrest in the Middle East as well as weaker equities and economic data out of China.
“With equity markets tumbling, escalating tensions between a Saudi-led Sunni bloc against Iran, ongoing hostilities in Syria, North Korea testing what it claims to be a hydrogen bomb, the once precious yellow metal is looking perky,” said analysts from Brown Brothers Harriman in a research note Wednesday.
For the past few trading sessions, gold has seen consecutive positive daily closes with futures jumping to a high of $1,092.60 an ounce Wednesday, a level last seen seven weeks ago. February comex gold futures have come down a bit and were last quoted up $8.70 at $1,087.10 an ounce.
Source: BBH, Bloomberg
Multiple factors may be contributing to this boost in gold prices and, on a technical basis, the metal may be hinting that it wants to move higher.
Analysts looked at gold hitting a six-year low in early December at around $1,046-1,047 and again two weeks later.
“If gold is carving out a bottom, then a retracement of the drop since the middle of October should be anticipated,” they said.
“If this is a double bottom, the minimum measuring objective is near $1,132,” they added.
According to the analysts, the 38.2% retracement is found near the mid-November high of $1,101 and the 50% retracement is $1,119. “The 61.8% retracement dovetails with the double-bottom objective. It is found near $1,136,” they said.
Aside from technical analysis, they found that gold’s correlation with major currencies like the Australian and Canadian dollars, which are usually positive, may also be signaling a breakout.
“Presently, those correlations are low and falling,” they said.
Likewise, gold’s correlation with equities may also be signaling a turnaround ahead.
“The idea that gold is a safe haven suggests it should be inversely correlated with the risk-asset, the S&P 500,” they said. However, the analysts continued, the correlation has been positive since November, “but at less than 0.1 is it not very significant.”
“On a purely directional basis (correlations on levels), the relationship between the S&P 500 and gold spent more time inversely correlated, but it is not particularly stable,” they added.