GOLD TODAY – Investor focus turns to Trump’s press conference

Jan 11, 2017 - 12:06 PM GMT
by
Short Term:
Medium Term:
Long Term:
Resistances:
R1 1,200 Key resistance
R2 1,267 200 DMA
R3 1,375 2016 high (July)
R4 1,400 Key level
Support:
20 1,152
50 1,185
100 1,242
200 1,267
Support:
S1 1,152 20 DMA
S2 1,150 Key level
S3 1,050 Medium-term support
S4 1,046 2015 low
Stochastics:
Legend:

DMA = Daily moving average

UTL, DTL = Uptrend line, dowtrend line

The momentum index allows us to determine whether momentum is positive (>0) or negative (<0). We use a parameter equal to 10, corresponding to momentum over the past 10 days. 

ADX – average directional index. This allows us to gauge the strength of the current trend (above 20, the trend is strong; below 20, the trend is weak).

The combination of momentum and ADX allows us to determine the current trend (up orA down) and its strength (strong or weak).

Technical Comment

Momentum is in positive territory while ADX is above 20, suggesting a strong uptrend in motion.

Analysis

  • Gold has rebounded strongly since late in December, breaking above its 20 DMA, which reflects brighter sentiment. We are slightly bullish over the very short term (around one month) although we expect only limited buying pressure. Over the longer run, the technical picture remains bearish, as our monthly chart highlights. We will stick with our view that the uptrend that started last year has ended.

  • On the upside, next key resistance levels are $1,200, the 200 DMA and $1,300. On the downside, a renewed break below $1,150 may result in additional selling pressure en route to $1,100 and, ultimately, the 2016 low.

Macro drivers

Gold has risen roughly 6% since its low from mid-December, chiefly owing to a friendlier macro environment. All the precious metals have climbed since the start of the year.

The more favourable macro environment for gold is characterised by a weaker dollar and lower US real rates. While the dollar rally seems to have peaked, with the DXY flat so far in January, US real rates have moved sharply lower since mid-December. The 10-year US TIPS yield at 0.41%, is strongly lower than its peak from mid-December at 0.71%.

This may have prompted renewed speculative buying interest but we need to see Friday’s COTR to confirm this. ETF investors have so far not responded to the friendlier macro environment (see below).

Investment and speculative flows:

  • ETF holdings – at 1,945 tonnes as of January 10 – have fallen 10 tonnes since the start of January after dropping 100 tonnes or 5% in December and 107 tonnes or 5% in November. But in the whole of 2016, ETF investors were net buyers at 473 tonnes, corresponding to an increase of 32% in total ETF holdings.
  • Speculative positioning dropped for an eighth straight week over December 27-January 3, according to the latest CFTC statistics. Still, we expect fresh buying in the coming weeks while the dollar consolidates, US real rates decline and risk aversion grows. 

Physicals:

  • The Chinese physical market has improved noticeably since the start of the year due to 1) fears of supply constraints after the implementation of import quotas; 2) the depreciation in the yuan; 3) the fall in domestic prices; and 4) favourable seasonality as Chinese New Year approaches.
  • But in India rates have remained at discounts, principally because consumers remain cautious about making purchases after the government crackdown on “black money” and the ban on 500- and 1,000-rupee notes (see our latest physicals report).

Macro:

Investor focus will turn to the long-awaited press conference of US president-elect Donald Trump. Investors will pay close attention to his statements and may react accordingly in the financial markets. Volatility in most risky assets, which is at a very low level judging by historical norms, may pick up. Gold could benefit in this environment marked by heightened uncertainty.

Conclusion

We have become slightly bullish toward gold over the very short term after the break above the 20 DMA, principally because of our willingness to play current upward momentum. But a fresh break below the 20 DMA would force us to jump back in on the short side.

We remain positive over the short term because we expect a resurgence of risk aversion in the first quarter similar to last year, which should result in a fall in the dollar and in US real rates, in turn boosting gold prices. For now, risk-on sentiment remains resilient, in part thanks to solid macro data, so we remain patient. At least, we our comforted by the stronger market action. 

See more information in our December Gold spotlight.

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