GOLD TODAY – Buying re-emerges

Jan 4, 2017 - 9:44 AM GMT
by
Short Term:
Medium Term:
Long Term:
Resistances:
R1 1146 20 DMA
R2 1181 Nearby resistance
R3 1301 Break down level
R4 1303.80 May high
R5 1375.25 2016 high
Support:
S1 1199.85 May low
S2 1172 61.8%
S3 1146 20 DMA
S4 1122.90 Low so far
S5 1071.45
S6 1046.40 Dec low
Stochastics:Bullish
Legend:

R/SL= Resistance/support line

HRL = horizontal resistance line

UTL = Uptrend line

BB = Bollinger band

Fibo = Fibonacci retracement line

H&S = Head-and-shouder pattern

Analysis

  • Spot gold appears to have put in a base and prices are now rallying.
  • Prices have got back above the 20 DMA but are still below the 61.8% Fibo of last year’s rally.
  • The stochastics have shot higher, which suggests that buying sentiment is strengthening.
  • The downward trend has dominated since October when prices broke below the sideways consolidation pattern.
  • The late-2015 to July 2016 rally travelled $328.85 per oz. The pullback was $252.35 per oz, which is a 76% retracement.
  • As with the rally in early 2016, a rally may again unfold that the market struggles to have confidence in. 

Macro picture

Gold prices are rallying. We think there are many supporting factors, especially all the uncertainty that lies ahead with the changeover in the US administration, Brexit and the weakening trend in the yuan. Bitcoin prices are rallying sharply, which is widely being attributed to Chinese investors looking to reduce exposure to their fiat currency. Gold may well be bought too – not everybody has faith in Bitcoin.

For now the broader markets seem unfazed by potential geopolitical tensions and are not focused on the uncertainty 2017 brings – but we think this will change before too long. Indeed, gold’s current rally may be pointing to a change already. When the markets get nervous again, gold may be well placed to soak up money coming from profit-taking in other asset classes, especially now that prices look relatively cheap again after gold’s downward trend in the fourth quarter of last year.

CFTC data for December 27 showed the run of long liquidation continued. The net long fund position dropped 16,491 contracts to 98,343 contracts, down from a peak of 315,963 contracts on July 5. Most of the sell-off has been from long liquidation but short-selling has picked up since mid-November. The pick-up in short-selling could lead to short-covering if this rally gathers momentum.

Fund investors may have lost interest in gold but gold investors in ETFs have not been notably active in making redemptions. At the peak in holdings last year, they had bought close to 700 tonnes; since the peak, they have sold 222 tonnes.

Conclusion

The rising dollar and the environment of higher interest rates were always going to be headwinds but not insurmountable ones if investors were looking for safety. Since the US election, confidence has been running high and safe havens are not in demand. But now we are in 2017 and with so much political uncertainty ahead, we think gold will become a sought-after asset again, especially given its price has already corrected – unlike most other asset classes.

All trades or trading strategies mentioned in the report are hypothetical, for illustration only and do not constitute trading recommendations.