GOLD AT CRITICAL TECHNICAL SUPPORT

After a decisive rally from 1045 USD/oz low in December 2015 gold reached all the way to 1375 USD/oz in July of this year. There were many driving factors for this move including monetary policy, strong investment demand and long term technical factors to name a few.

In recent days however, the precious metal lost more than 90 dollars and touched the critical 200-day moving average. It now stands at 1251 dollars per ounce. The big question is whether gold can reignite recent uptrend and pull out of the latest correction cycle. While on the long term it certainly could do so, there are a few short-term and mid-term challenges for gold to overcome.

 

MOUNTING PRESSURES

First very important short-term trend that could develop into a structural move is the uptick in interest rates. Interest rates have been increasing during last few days or even weeks. Bond market yields have moved higher by more than 0,25% on longer duration paper from the low point in yields. Composite risk free rates on foreign exchange market have been on the increase for longer than that as well. This is not an environment where gold could make easy upside progress since it does not pay any interest. What’s more, this development could potentially last for years.

Technically gold does not look bad yet. In fact when prices fall toward 200-day moving average from a strong uptrend, this indicates a buying opportunity with better than usual chance. Nevertheless, the headwinds coming from the increasing rates environment could outlast support seen in charts. Therefore gold could lose a lot of ground if it breaks significantly under the mentioned technical support.

 

SPECULATIVE POSITIONS

Commitments of Traders (COT) data shows gold has been the target of speculators, which are willing to take a chance and potentially take advantage of the gold’s upside. At the top of the recent uptrend move the COT positioning was actually at a record high. This means historically more speculators were buying the precious metal than ever before.

Generally, when the speculative public is extremely bullish this indicates a potential reversal to the downside. The situation for gold at the moment is that this group of market participants is still holding a substantial long position. Although the positioning backed off from extremes, speculators still haven’t given up on the upside hopes in gold price. Net-net this is a negative factor for gold and can trigger additional supply in the market if prices don’t fulfill speculators’ wishes. If they decide to sell their positions or are forced to sell them, prices could fall further.

 

RETURN TO NEUTRAL

In case gold will lose the battle with the prevailing short-term forces in capital markets its technical picture will change significantly and recent uptrend will mostly be invalidated. In such case next support resides at 1200 dollars and if that breaks gold could finds itself in a bearish head and shoulders pattern. Risk to the downside is therefore greater than at any point during last 6 months. If head and shoulder pattern develops it could lose all this year’s gains and move back toward 1050 dollars.

Gregor

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